Bank's inflation model 'is faulty

Threadneedle Street's leading dove, Sushil Wadhwani, yesterday stepped up his personal battle for more cuts in interest rates to stave off recession, with a claim that the Bank of England systematically overestimates the threat of inflation.

Mr Wadhwani said in a lecture that the Bank's forecasting model for the economy was biased in favour of inflation, as the City marked him down as the monetary policy committee member who had urged even deeper cuts in the cost of borrowing at the MPC's meeting this month.

Minutes of the discussion released yesterday show that one MPC member - believed by the City to be Mr Wadhwani - at one stage proposed a three-quarter point cut, before agreeing to a half-point reduction to 4%.

Only Ian Plenderleith, the Bank director in charge of financial markets, opted for a quarter-point reduction, with the other eight members of the committee deciding to take out a bigger insurance policy against global recession spreading to Britain.

Speaking in Edinburgh yesterday, Mr Wadhwani said that the intense competition prompted by globalisation had not yet been captured by the Bank's complex model of the economy. "My personal judgment is that the current published best collective projection is overstating the degree of inflationary pressure."

Last night the Bank refused to comment on Mr Wadhwani's suggestion that its model had been responsible for "economically and statistically significant" errors since 1998, during which period inflation has persistently undershot the government's 2.5% target.

Although Mr Wadhwani said that there was "much work for us to do" on the model, a Bank spokeswoman last night declined to confirm whether it was reexamining the system used for calculations.

Independent members of the MPC now have their own resources to undertake research following Mr Wadhwani's battle with the Bank's hierarchy for them to have own economists.

He argued yesterday that prices of goods in Britain were much more susceptible to falling prices elsewhere in the world than had previously been thought, and that the government's data under-estimated the capacity in the economy.

Yesterday's minutes showed that MPC members believed a half-point cut in rates was justified because "the slowdown in world economic growth was now likely to be both deeper and longer than earlier thought". Without a further interest rate cut, "UK demand and output growth would be weaker over the next year or so than expected at its previous meeting".

Figures from the US yesterday showed that the worst of the job-shedding following the September terrorist attacks might be over, with 427,000 new jobless claims last week, down from 442,000 the previous week.

Some members of the MPC expressed concern that the value of the pound could fall sharply in the coming months, adding to the cost of imports and thereby jeopardising the inflation target.

However, City analysts said that the size of the majority in favour of the rate cut pointed to further easing in coming months. They pointed to figures showing investment by Britain's manufacturers collapsing at a record pace in the third quarter of the year as evidence of the retrenchment taking place in the corporate sector. Official figures showed a 13% drop in manufacturing investment between the second and third quarters of 2001, with overall business investment falling 4.1%.