27 JANUARY 1967, Page 24

Don't Bank On It

By JOHN BULL

WHAT did Mr Callaghan's summit meeting of finance ministers at the weekend achieve? I want to discuss the prospects for interest rates in the light of the Chequers talks and then to consider the implications for a par- ticular sector, the clearing banks.

The communiqué was a little classic of its kind. Much the most positive statement was that the signatories would behave in such a way as 'to enable interest rates in their respective -countries to be lower than they otherwise would be.' The rest of the communiqué was couched in phrases of carefully calculated vagueness. Yet the very oddities of the prose provide first-class clues to what actually happened.

From the beginning, M. Debre from France and Signor Colombo from Italy made it plain that their domestic economic situations were different in kind from those of the three other parties. France and Italy are both accelerating away from recessions, the former from a mild one, the latter from a severe downturn. Britain, the United States and Germany, on the other hand, are facing a decline in business activity. The differences are important. France and Italy are moving out of positions of trade surplus. Germany and Britain are both moving in the opposite direction. The United States' external account continues to reflect the foreign exchange cost of the Vietnam war more than any other factor. Then the pertinent question, how far each finance minister at the table controlled the actions of his central bank, was raised. At this point Mr Fowler from the United States and Professor Schiller from West Germany shifted nervously in their seats. Neither could put his hand over his heart and say : my central bank does what I tell it to do.

The conversation must then have turned to West Germany in particular. All agreed that if the Bundesbank could be persuaded (it cannot be compelled) to reduce German Bank rate some- what further—it came down by a disappointingly narrow margin a few weeks ago—then life would be easier all round.

The crux of the problem had been reached. Unfortunately, the record gets a little indistinct at this juncture. Afterwards the journalists were told that no bargains had been struck, no pro- gramme of interest rate reductions on the 'after you, Claude' principle had been agreed. Each minister merely stated carefully what the obstacles to interest rate reductions in his own country were, and left it at that. Certainly it appears that nobody got out a piece of paper and tried to compose a timetable for action. But it will be no surprise if rates now move down roughly in step.

The stage is thus set for lower interest levels. Two important elements in the City of London have voted for this possibility with their feet— or rather, with their purses. I refer to the dis- count market, which has bid up for Treasury Bills to the point where, for the time being, it is making a running loss. The venture into the red is ridiculous except on the supposition that Bank rate will come down very soon.

The other place where a fall in Bank rate is now well discounted is the gilt-edged market. Turnover this week has been heavy and prices have risen quite markedly. There they are even talking of a one-point cut rather than the half- point reduction widely canvassed. . Against this you can set some growls from the top central banker in the United States to the effect that there can be no let-up on the credit front until the payments deficit is elimin- ated. Finally there is Mr Harald Peake, chairman of Lloyds Bank. He is against an early reduction in Bank rate but would like to see an immediate relaxation of general credit restrictions.

That, of course, is about the best recipe there could be for increasing bank profits. The two chief factors which determine clearing bank earnings are the level of interest rates and the volume of advances.

Last year Bank rate averaged 6.4 per cent, which was practically the same as the figure for 1965. Bank advances fell sharply towards the end of the year, but over 1966 as a whole more business was done. Profits, therefore, should have been a little higher. In fact only one bank, West- minster, achieved such an outturn. Why?

It seems that the Westminster simply avoided certain major items of expense which some of the others ran into. It reckons to be about the most advanced in the use of computers and has now lived through the inevitable period of teeth- ing troubles which follows installation. Some of its fellows are still organising their computer lines. The Westminster entered the credit card field by acquisition—Diners' Club—and not by starting up from scratch as, say, Barclays has done. Barclays' method is inevitably expensive.

This year the prospect is not alluring. As we have seen, interest rates look bound to drop quite smartly. And the chances that advances will go ahead at all significantly are small. This com- bination, the opposite of Mr Harald Peake's de- mand, could well spell stationary dividends.