Outlook: The hares and the tortoise in the race to cut interest rates

Nuclear meltdown; Benfield in denial

US rates kept on hold and inflation on this side of the pond creeping up at a faster pace than expected. At this rate the European Central Bank could become the first to cut the cost of borrowing. There remain plausible reasons for trimming rates both here and in the US – and last night's statement from the Fed highlighted a few of them even though the decision to hold was unanimous.

Economic weakness is now the greatest threat to the US economy whereas before it was counterbalanced by inflationary risks.

Financial markets also remain weak and volatile and just as Wall Street had drawn some strength from the prospect of a rate cut, the Fed's decision to hold could just as easily be the trigger for a renewed sell-off in coming days.

US consumer confidence is on the wane, growth and productivity forecasts are being revised downwards all the time and there is a fragility about the American economy which is only likely to be accentuated the nearer it gets to the anniversary of 11 September.

In the end, the arguments against a half-point cut – that it would be a sign of panic or conversely stoke up incipient inflationary pressures lying just below the surface of the American economy – won the day yesterday.

Meanwhile, the higher UK inflation figures strengthen the case for rates at least staying on hold for a further month when the Bank of England meets early in September, notwithstanding what the industry lobby had to say.

Having been the two hares in the race to cut rates, the Bank and the Fed could now find themselves overtaken by the tortoise in the form of Wim Duisenburg and his colleagues on the ECB. Its bias has already gone from tightening to loosening monetary policy and yesterday's ghastly business confidence survey from Germany, the eurozone's biggest economy, could be just the kind of evidence the ECB needs to act.

Nuclear meltdown

British Energy's dream of a new atomic dawn is fading fast and now it has got a meltdown in its share price to worry about as well. Yesterday the stock fell by another 30 per cent to 63p and is now trading at less than a tenth of its value at the peak.

The problems which have hit the UK's electricity generating industry as whole – falling prices brought about by excess capacity and a harsher trading environment – are well rehearsed.

But British Energy has suffered more than most. Because its stations are baseload, it has to keep them going and take whatever price the market is prepared to pay. When they are forced to shut for safety reasons, as happened yesterday with Torness, the company still has a sizeable workforce to pay to sit around and do nothing.

Both reactors at Torness are now shut because of vibrations in their cooling systems and Heysham, a sister station, may also need to be closed as a precaution.

Most other power companies have been able to hedge their falling returns from generation by making more profit from selling electricity to the end customer. Unfortunately, British Energy does not have that luxury. It went briefly into the retail market by buying Swalec but then just as swiftly sold the business.

It decided instead to branch into the coal-fired generating market, paying £646m for the Eggborough station just before the valuations on these sort of assets went up in smoke.

The result is that British Energy has what looks like a terminally unprofitable UK generating business for all its attempts at cost cutting. It is now relying on the Government to cut its rates bill and relieve it from the climate change levy in order to turn back into profit, which is not a comfortable place to be.

British Energy would also like the Government to sanction a new generation of 10 nuclear reactors and relieve the company of £3bn in historic liabilities at the same time so it can make out a plausible case in the City for building them.

But the idea of building any more stations looks a non-starter when the company is having such difficulties running the ones that it has got. It is hardly a good advertisement for raising the £10bn that a new nuclear programme would require.

In the case of British Energy, the buck stops with the executive chairman Robin Jeffrey, a fiery Scot who is a company man right down to his monogrammed work shirts.

Mr Jeffrey got rid of the chief executive Peter Hollins in June last year when the shares were still worth a positively glowing 280p and gave himself the Cadbuarially incorrect dual role of chairman and chief executive. The senior independent director on the board is Sir Robin Biggam. The other non-execs include Clare Spottiswoode, the one-time laughing regulator at Ofgas, and Ian Harley, who lost the Abbey habit last month.

A failing nuclear company is the stuff of nightmares for government but it is not much fun for investors either. With the British Energy dividend now clearly at risk, it may only be a matter of time before Sir Robin has to summon the courage and press the nuclear button to jettison Mr Jeffrey.

Benfield in denial

What's this? A statement from the British re-insurance broker Benfield denying that it is about to swallowed up by Marsh & McLennan, its much bigger and brasher American rival?

Perhaps that flying visit Benfield's chief executive Grahame Chilton made to the States 10 days ago was just a courtesy call to see how its recently acquired US business EW Blanch is shaping up.

There are denials and then there are non-denial denials and the press release issued yesterday by Benfield fits firmly into the latter category.

There are all sorts of reasons why Benfield would make a good fit for M&M and Mr Chilton knows them better than anyone. The UK is the one area where the US giant does not have a presence in the re-insurance broking market. Furthermore, if Benfield is to take advantage of the hardening in insurance rates post 11 September then it needs access to the capital that its private status denies it but which M&M could easily provide.

Benfield as good as hoisted the for sale banner last year when it let it be known that it was considering a stock market flotation. A trade sale would be much simpler for Mr Chilton and Benfield's chairman John Coldfield, enabling them to cash in their chips without having to worry about messy arrangements such as lock-in periods.

The top execs at Benfield are not short of a bob or two. Mr Chilton himself is worth an estimated £120m and, even after the death of its flamboyant former head Matthew Harding in a helicopter crash, Benfield could still boast the single largest number of entrants in the Sunday Times's 'Rich List'. But you can never have enough. Stand by for more announcements from Mr Chilton's office.

m.harrison@independent.co.uk