LONDON BRIEFING:Retail will not be split from investment arms. And inflation fall may stave off an interest hike

ANY LINGERING expectations of a radical clampdown on the British banking industry have been laid to rest with the release earlier this week of the Independent Commission on Banking’s eagerly awaited interim report.

The 200-plus-page tome put forward a number of measures to improve competition and capital adequacy among the banks but, crucially, stopped short of forcing a split between investment banking and retail banking.

Instead, it says High Street banking operations – those taking in savings, loans, mortgages and current accounts – should be ring-fenced from the so-called “casino banks” in an effort to avoid contagion in the event of another banking crisis.

Those ring-fenced retail banking operations should be required to raise their core tier-one capital – the key measure of a bank’s financial strength – to 10 per cent, affording them, and thus their customers, extra security.

Taxpayers, too, should be secure in the knowledge that, in future, investment banks can be allowed to go under without dragging the rest of the bank with them, or necessitating another expensive bailout.

The chairman of the commission, Sir John Vickers, a former chief economist at the Bank of England, made no pretence that his report was radical, preferring to describe it as “moderate” in tone.

But even he must have been dismayed to see the jubilant reaction in the City; notably, an immediate surge in the share prices of Barclays and Royal Bank of Scotland, both of which have substantial investment banking operations.

If the banks are winning, it is fairly safe to bet the rest of us are losing. What the big banks feared most of all was being forced into a complete break-up.

But that is now off the agenda and there was a widespread view the commission had “bottled it” by failing to go all the way. There is also a fear ring-fencing will be hard to achieve and even harder to enforce; in other words, the worst of both worlds.

One of the reasons given by Vickers for stopping short of a complete separation of the banks was the cost involved, although no figures were provided in the report. But ring-fencing will still prove hugely expensive, adding perhaps as much as £10 billion to annual running costs at the banks. There’s no prize for guessing who’ll pick up the tab – the customer.

Vickers was unapologetic about the prospect of costs being passed on, saying that if the public wanted safer banks, they would have to pay for them. “There’s no such thing as a free lunch,” he said, enraging consumer groups.

Customers may well dispute, with some justification, whether they’ve ever had too good a deal from the banks, but it’s a deal that is going to get a whole lot worse once the reforms are put in place. Initial calculations from industry experts suggested the changes could increase the cost of an average mortgage by as much as £1,000 a year, and other loan and overdraft fees are expected to rise too.

                  *****

First the good news on Britain’s cost of living – against all expectations, inflation fell last month for the first time since last summer. Now the bad news – at 4 per cent, the consumer prices index (CPI) is still double the government’s 2 per cent target.

City economists maintained their dismal forecasting record, with many expecting the CPI to be unchanged at February’s 4.4 per cent and a few predicting a climb closer to 5 per cent. The immediate impact yesterday was a fall in sterling, as a hike in interest rates next month now looks highly unlikely.

The surprise fall, which was largely because of lower food and drink prices, will have come as a welcome relief to Bank of England governor Mervyn King, increasingly under fire for his insistence that Britain’s high inflation is a temporary phenomenon driven by the recent VAT rise and external forces such as rising commodity prices and the weaker pound.

Retailers will be relieved too that a rate rise now looks to have receded until the autumn. Just hours before the CPI data, the full extent of the fall-off in consumer spending was underlined by the British Retail Consortium, which reported the biggest drop in sales – 3.5 per cent year-on-year – since it began its monthly survey a decade and a half ago.

The inflation reprieve will almost certainly prove short-lived, with the rate expected to start rising again next month as higher oil prices feed through. The CPI may still hit 5 per cent before the year is out. But, for the next few weeks at least, Mervyn may find the hawks on the rate-setting Monetary Policy Committee slightly easier to control.

Fiona Walsh writes for the Guardianin London