Actual short rates are now well above their optimal level in both the US and Japan while in Europe actual short rates are

Actual short rates are now well above their optimal level in both the US and Japan, while in Europe actual short rates are about optimal.For the OECD as a whole, the Taylor Rule suggests that the current level of short rates is almost 100 basis points too high, which is an unusually large discrepancy. This will undoubtedly add strength to calls for interest rate cuts in the major nations in the months ahead, especially in the United States. In order to solve this problem, Stephen Hull of Goldman Sachs has now calculated comprehensive exchange rate indices for all of the major currencies, including all of the relevant emerging market currencies. Because of the recent collapse in Asian currencies, these new indices have appreciated much more than the old ones, and this implies that monetary conditions in the developed economies have tightened much more than was previously believed.In particular, based on the old or conventional exchange rate indices, the MCI in the United States stands only 0.7% tighter than its 1987-95 average. By contrast, on the new exchange rate index, US monetary conditions are estimated to be 2.5% tighter than average, and – more worryingly – they are now tighter than at any time over the past ten years.No doubt some analysts will argue that this indicates that monetary conditions in the G3 are unnecessarily tight, and that there should therefore be a bias towards renewed easing by the Federal Reserve and other central banks.This assessment will be further strengthened by the fact that the Taylor Rule (a mechanistic way of determining the optimal level of short-term interest rates via a relationship with output gaps and inflation) now indicates that monetary policy in the G3 economies is too tight.As can be seen from the accompanying graph, the recent decline in inflation across the developed world has reduced the optimal level of short rates implied by the Taylor Rule very significantly. These indices have therefore offered no support to those analysts who have argued that global monetary conditions are too tight.However, these MCIs have until now been based on standard trade weighted exchange rate indices (TWIs), as published for example by the Bank of England and other central banks.

These indices have typically excluded emerging market currencies, which is of course potentially very misleading. This question is, of course, best answered by looking at monetary conditions indicators (MCIs), which combine short-term interest rates, bond yields and exchange rates into a single indexUp until now, the indices which have been published based on this methodology have suggested that OECD monetary conditions have not only eased very substantially in the last three years, but have attained levels in absolute terms which are towards the easiest end of their normal cyclical range. The real 10 year bond yield in the G6 economies now stands at about 2.7%, which is more than one standard deviation below the 4.0% average which has been observed over the past 10 years.The key question for the developed economies is whether these accommodative readings for domestic monetary policy will be more than offset by the contractionary impact of appreciating real exchange rates. Nevertheless, the level of real short rates at present (2.5%) is still roughly 0.5% below the average for the previous decade, and the impact of any increases in real short rates has been more than offset by declines in real bond yields over the same period.

The fear among some analysts is that the global central banks may be inadvertently setting monetary conditions so tight that deflation becomes a genuine possibility. Up until now, there has been very little evidence that global monetary conditions are too tight. The growth in real broad money in the major economies has been accelerating sharply in recent quarters, and it is now running at almost twice the rate of growth in real GDP. Narrow money aggregates are also showing robust and accelerating growth for the OECD economies. Furthermore, the rapid increases in leading indicators which we are observing in both the US and the EU certainly do not seem to imply that monetary conditions are overly restrictive.
Admittedly, it is true that real short term interest rates have risen quite markedly in the G6 economies in the past year.

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A letter sent to Midland, Barclays and other major banks by the OFT and obtained by The Independent, asks: “Does your company explicitly or implicitly refuse applications for current bank accounts for members of any specific groups, eg those of no fixed abode.”The letter, dated 28 January, requests information on how many current accounts have been refused, what percentage of business this amounts to and “What were the main reasons for refusal?”The OFT gave a deadline of 18 February for the answers, but a stunned banking community admits many have not been able to comply with the short notice.The OFT believes that 20 per cent of the population do not have bank accounts and has questioned whether the needs of vulnerable consumers are being met. BRITAIN’s high street banks fear a government crackdown after an official watchdog launched an unprecedented probe into their treatment of poor customers. The perennial takeover candidate should do its bid prospects no harm at all with profits emerging around pounds 1.1bn against just over pounds 1bn.Some famous mid cap names feature in a busy week. It is floating off its Australian interests and is looking for buyers for such diverse operations as glass and plastic bottles and building products.BTR is one blue chip to miss the fun. The shares were above 400p in 1994; they closed last week at 161p after touching 152p, a 70 per cent under- performance.Rolls-Royce, the aero engine group, should offer a sharp profits advance, from pounds 220m to pounds 274m; non Footsie Vickers, seeking to sell its Rolls-Royce car division, is on line to produce pounds 74m (pounds 83m).Enterprise Oil will show the scars of the strong pound, lower production and higher costs and should announce net income of, say, pounds 100m against pounds 142.5m.Other blue chips reporting are Cadbury Schweppes pounds 570m (pounds 592m); Hays pounds 90m (pounds 71.7m); Ladbroke pounds 222m (pounds 163m) and Billiton pounds 130m (pounds 93m).Zeneca, the drugs group, is another on the profits treadmill. BTR his being reshaped by Ian Strachan who has undertaken an extensive disposal programme.