After Bank rate
JOHN BULL
Suddenly City markets have got a great deal of reasonably up-to-date information to digest. The puzzle over Bank rate—will it be this week, will it be next?—is over with the half-point cut announced last Thursday. Indecision in Frankfurt, too, has been re- solved with a panicky If point increase in German Bank rate to 74- per cent and the
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N is for Notice [final]
Italians have followed suit. What remains unclear is how relaxed the Federal Reserve Bank (particularly the New York branch) in the United States is feeling with a new chair- man at its head, Dr Arthur Burns. But a number of small American banks have cut their lending rates to customers, and interest rates in the New York money markets con- tinue to edge slowly downwards.
There is no official information on the flow of foreign exchange into London since the tide turned last autumn. We have all been trying some inspired guesswork, a process which consists of asking the foreign exchange dealers how much business they think there has been and then trying out their estimates on Bank of England and Treasury officials. The answer we came up with for the final three months of 1969 was an inflow of £400 million. Some obscure Treasury statistics published a few days ago suggest that this figure is about right. Since then another £400 million may have come in, £150 million in January, £250 million in February. Certainly the official reason for the cut in Bank rate was the size of the inflow, gratifying in itself except to the degree that it contains hot money. At all events, what the latest figuring of Britain's reserve position and foreign debts schedule boils down to is that there is a good chance that the whole of our short-term in- debtedness to central banks (f2,000 million or so) will have been paid off by the middle of this year, leaving International Monetary Fund debts (they reach £1,100 million at their peak) and the rump of our postwar debts to be paid off. The extinction of central bank indebtedness would be an achievement of first class economic and polit- ical importance. It would mean the balance of payments restraint on economic policy would be gone and that the Tory party will have to shut up about the millstone of debt Mr Wilson has hung round our necks.
The National Institute has weighed in with its regular series of economic forecasts —unfailingly interesting predictions, if not always much of a guide to actual events. This time the Institute argues that on current policies output is likely to rise by only 2 to 24- per cent and that to bring this expansion up to a more desirable 34- per cent rate would require a reduction of taxation in the next Budget of a whopping £650 million. Well, we will never know whether the In- stitute is right because there is not the faintest chance of a give-away Budget on this scale being proposed, not even in an election year. The advice which the Chan- cellor is now getting, from both his Treasury officials and the Bank of England, is one of extreme caution. You can sum up their atti- tude to the last six months' trade figures- as 'gosh, it's been good, but it can't last'.
As far as the equity market as a whole is concerned. I concentrate on two indicators —price inflation and company profits. The National Institute forecast is for a 4 per cent rise in consumer prices between the final quarter of 1969 and the final quarter of 1970. That is quite steep but probably not so great as most people would have guessed. However, as far as the equity market goes, it is what people think rather than what economists forecast that matters. The cur- rent round of wage settlements has created the belief that prices are shooting up. And that is the kind of hunch that drives people into unit trusts, into the equity market and out of gilt-edged securities.
For forecasts of the course of company profits I turn to the work of London Business School economists Professor R. J. Ball and Tony Burns, published in the market review of Phillips and Drew, leading stockbrokers. They expect a rise in gross trading profits for 1970 as a whole of about 6 per cent without making any allowances for Budget changes. Allowing for some re- flation the two economists expect this rate to improve to near 8 per cent from the middle of the year. Phillips and Drew's conclusion is that 'we see no reason to alter the view that we have expressed in recent months, namely that the trend of the equity market is likely to be upwards during most of 1970 and that this is the time for buying equities rather than selling'—with which I would agree. As for gilt-edged securities I think that the combination of the half-point cut in Bank rate and the sharp rise in German bank rate has kyboshed them for the time being. If you have fixed interest securities, you should keep them. But I would not be a buyer at the moment.
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