14 AUGUST 2004, Page 28

The Bank cashiers the grand old Duke, and plays footsteps with Granny Gordon

he Bank of England has sacked the grand old Duke of York. I New wars bring new methods, and it now bases its tactics on Grandmother's Footsteps. The Duke gave his name to the Bank's standard manoeuvre for setting interest rates. With a brisk cry of 'Charge!' it would march them up to the top of the hill and could then take its time about marching them down again. These shock tactics might see Bank rate raised by 1 or 2 per cent at a time — even more in emergencies. They were supposed to get the bad news out of the way, and sometimes did. Then monetary warfare changed, and the Bank rewrote its tactical manual and gave up the idea of these frontal assaults. Instead it pushes rates quietly forward, a step at a time, with no attempt to shock. On the contrary: boredom, so we are assured, is its friend. So who is its enemy? Grandmother? Who else could that scowling figure be, back turned but eyes gleaming? To charge ahead and rush rates up would evoke a gorgon's stare from Granny Gordon. This, after all, would reflect on his stewardship. The message would be that he, like the rest of us, was borrowing and spending too much, and that it was time for shock tactics. What insolence! Was it for that he had granted the Bank its independence? The row that ensued would be sulphurous. No wonder it prefers softly-softly tactics. All the same, if the Bank, which has taken four steps in six months, had taken one stride at the start, the bad news might by now be out of the way. Bring back the Duke!

A jab at the brake

The Bank would never say so, but you and I might think it has been jabbing at the brake to stop a skiddy pre-election boom from running the economy off the road. Mervyn King, the Governor, prefers to call this a balance between significant risks. By the oddest coincidence, the Bank sees the economy surging ahead until May of next year, with capacity at full stretch and government spending at full throttle. The Chancellor has called for a statistical revamp to show how productive all this spending really is. Maybe, says the Bank, but that does not ease the pressure it creates. That spells inflation — but, on the other side of the balance. the Bank expects the boom in house prices to subside and so to check our urge to spend and borrow. As mortgages get more expen sive, we may take the point. Even so, the chances are that in the months ahead, the Bank will be jabbing at the brake again.

Dodgy dossiers

Just what Mervyn King needs: a new index of inflation, leaving more things out. Like that, it will be easier to hit. The Office of National Statistics thinks that an index without alcohol, tobacco, food and energy would be less volatile. It would not, of course, measure the cost of living, but who cares? Certainly not Gordon Brown, who gave us his new Consumer Prices Index, leaving out the price of housing. If his dossier omits these weapons of mass inflation, we shall all feel safer, shan't we?

Trimming the hedges

So soon? It seems only the other day — it was the other month — that I cast doubt on the fad of the moment: 'If I had to look out for a case of financial fatigue, my money would be on the hedge funds.' Any number of bright sparks — well, sparks, anyhow — seemed to be starting one. Conservative investors, like charities and pension funds, had found that their conventional investments in shares and bonds were getting nowhere, so if these new chaps could make money in all weathers, why not back them? They charged for their skills, of course: perhaps 2 per cent, year by year, of the money under management, plus a fifth of all gains (the losers kept the losses) and an extra layer of charges for a hedge fund of hedge funds, In a world where risks and rewards go together, I found it hard to believe that all these funds could generate such rich rewards without running unspecified risks. They have, in fact, been finding it harder to make any money at all, and some have not succeeded. Man Group, the leader in this , field, has lost one third of its stock market value this summer, and other promoters' I shares have been taking steeper falls. A shrewd hedge fund manager would have been short of them. Some new bright spark will be sure to propose it: for a fee, of course.

Hold me back

The struggle for Abbey has come to resemble an Irish pub fight. Santander, the Spanish swain now in possession, sits in a corner and mumbles to his cronies about the harsh things that he plans for this girl once he gets her home. All the other putative suitors start to take their coats off very slowly, while urgently muttering over their shoulders: 'Hold me back! Hold me back!' Their best chance must be that the garda from the Competition Commission will turn up and handcuff everyone, Santander included. A nice long barney down at the station would follow, and refreshments could be sent in. None of this would do much for Abbey, but what could? One clue reaches me, though, from 221b Baker Street, long the home of Abbey and before that (as I was saying last week) the address of a medical man and his detective colleague. I am reminded that at the Abbey Grange — 'Come, Watson, come! The game is afoot!' — they investigated the consequences of a misalliance and the disappearance of the family silver, and found that appearances deceived: 'We have not yet met our Waterloo, Watson, but this is our Marengo, for it begins with defeat and ends in victory.' A long shot, Watson, a very long shot.

Not to win

Advancing from Barbados to Berlusconia by way of Athens, Tony Blair can underpin my policy, which is to compete for the 2012 Games and spruce up London's transport, but finish second. (Third would do.) To help reach the Olympic site in the Lea Valley, Lord Coe, its promoter, wants the banks in Canary Wharf to stagger their working hours, thus leaving more room on the Docklands Light Railway. The bankers could always offer the athletes a lift in their Porsches. On a line of form through Athens, the London Games would cost double their budget and drive one-sixth of our tourists away, but with luck, Lord Coe and the Prime Minister will drive the Games away instead.