Changes in lending market may save Clarke

COMMENT "Like retailers, building societies' margins are under pressure from consumers who are willing to shop around in a way not shown in the 1980s."

Financial markets - and everybody else - have got so used to the idea that interest rates will go up after today's meeting between the Chancellor and the Governor of the Bank of England that the actuality may not cause much of a stir. The news is likely in any case to get lost in the local election rout. None the less Kenneth Clarke should think long and hard before taking the plunge. The speed with which he withdrew the tax that wasn't - the proposal to tax mortgage insurance payments - showed just how sensitive the Government is to charges that the Tories have abandoned their commitment to home ownership. A further rise in interest rates will be greeted as the coup de grace to a housing market already on the brink.

The Chancellor's dilemma, however, may be less acute than in the past. Lady Luck may be riding to his assistance in the unlikely shape of structural changes in the lending market.

In a speech last year setting out how interest rate changes affect spending and inflation, Mervyn King, the Bank's chief economist, pointed out that the "potency of monetary policy" was affected by lenders' policies. If they raised their lending rates by more than an increase in base rates, that potency was increased; if by less, it was diminished.

Judging by the past three months, monetary policy is down on its testosterone count, certainly as far as the housing market is concerned. The building societies did not pass the last increase in base rate to their borrowers. And Halifax , which normally sets the lead, has said that even if there is a rise after today's meeting it will not pass it on in full.

With transactions in the housing market currently so low, this apparent munificence is less surprising than it might seem. Like retailers', building societies' margins are under pressure from consumers who are willing to shop around in a way not shown in the 1980s.

There is probably more to come. A recent report by Merrill Lynch argued convincingly that margins between borrowing and lending would halve from their current 2 per cent. The only question is how quickly. New lenders like Direct Line could do to mortgage lending what they did to general insurance selling: take the market by storm bringing down prices - the margin - in the process.

If building societies seek to fend off the new entrants from establishing a position, it will drop quickly. If they wait for the incursion to become large-scale, the decline will be more gradual. Whatever the speed, it is clear that if this scenario holds good, the impact on the housing market of a further tightening in monetary policy will be less than in the past.

A taste of MAM's own medicine

If the stock market tom toms are to be believed, Mercury Asset Management will soon be getting a taste of its own medicine. Though majority-owned by Warburg, it has always been keen to emphasise its independence and for choice would have cut its ties altogether. It may finally get its chance. The only problem is that once fully independent, with its shares broadly held in the City, it becomes that much easier to acquire, and plenty out there want to acquire it. Out of the frying pan into the fire.

MAM's best course, insiders insist, would be to form a strategic alliance with a similar fund management business in the US or on the Continent. The two might even take cross-shareholdings in each other. This was not, however, a strategy that MAM found very convincing when it held the fate of London Weekend Television in its hands. Something similar was proposed by Greg Dyke, then chief executive of LWT, in the face of a hostile bid from Granada. He deserved a hearing. LWT, after all, could not have been accused of failing to deliver the goods to its shareholders; it was a well managed, high-growth company - not unlike MAM. Did he get it? When the time came, MAM sold him down the river in the way its fund managers had with so many other highly performing companies. If the same fate now awaits MAM, Mr Dyke would be forgiven a feeling of quiet satisfaction.

An unsatisfactory nuclear outcome

The sight of plucky little Scottish Nuclear fighting off the big bad English barons of Nuclear Electric warms the heart, but the campaign was probably doomed before it began. This is a government in such dissarray and so desperate for tax-cutting revenue that it will scrape the bottom of the barrel to find it.

Because of the haste to find a package that will be half-way presentable to the City in a year's time, Scottish Nuclear and Nuclear Electric are to be merged under a single holding company that advisers believe will be simpler to sell. This is a deeply unsatisfactory outcome, and not just because a brass plate on an office suite in Edinburgh fools no one.

Scottish Nuclear is not obviously a better and more efficient company than Nuclear Electric. Comparing like with like, which means eliminating the two advanced gas-cooled reactors of troublesome older designs in NE's portfolio, the Scottish company is actually level-pegging on price per kilowatt hour. Undoubtedly it is a tightly run ship, but it inherited its two power stations and has built nothing since. NE, by contrast, has the management breadth and depth required to build the £2.5bn power station at Sizewell in Suffolk.

Marginal superiority in efficiency is not really the issue, however. The argument for separation is the one put forward by the regulator, Professor Stephen Littlechild, of encouraging competition. Although Scottish Nuclear does not directly compete in the electricity pool in England and Wales it exports to the South and wants to step up sales, which it could do by building fossil stations.

One way of offsetting the loss of competition that merger would result in would be for the Government to ensure that the old Magnox stations, which are to stay in state hands, are operated as an entirely separate company from the new combine rather than leaving them, as presently envisaged, to be managed by Nuclear Electric. This, however, would only add to costs and in any case would be a highly complex thing to do.

A better solution would have been to keep Scottish Nuclear independent but in state ownership, leaving a decision on what to do about it until after the Nuclear Electric privatisation. We are dealing here, however, with a government so fixed on the short-term horizon of a general election that such common-sense thinking goes by the board. There may even be a case here for Professor Littlechild to do what he does best and put a spanner in the works. If he can find grounds to take the merger of the two nuclear companies to the Monopolies and Mergers Commission, he should do so.

In the end, however, the whole debate may prove a fuss about nothing. Everything has its price and it is certainly possible to sell the nuclear industry. But to do so in the time scale envisaged would be a tall order even for a government fired with the energy and commitment that marked the Thatcher administration in its early years. As it is this is a Government more interested in getting away to the opera than working nights.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250 ...

Reach Volunteering: Trustees with Finance, Fundraising and IT skills

Voluntary and unpaid, reasonable expenses reimbursable: Reach Volunteering: St...

Day In a Page

Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

Why are we addicted to theme parks?

Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement
Tourism in Iran: The country will soon be opening up again after years of isolation

Iran is opening up again to tourists

After years of isolation, Iran is reopening its embassies abroad. Soon, there'll be the chance for the adventurous to holiday there
10 best PS4 games

10 best PS4 games

Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
Transfer window: Ten things we learnt

Ten things we learnt from the transfer window

Record-breaking spending shows FFP restraint no longer applies
Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

‘Can we really just turn away?’

Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

Nine of Syria and Iraq's 10 world heritage sites are in danger...

... and not just because of Isis vandalism
Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

Girl on a Plane

An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
Why Frederick Forsyth's spying days could spell disaster for today's journalists

Why Frederick Forsyth's spying days could spell disaster for today's journalists

The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent
Markus Persson: If being that rich is so bad, why not just give it all away?

That's a bit rich

The billionaire inventor of computer game Minecraft says he is bored, lonely and isolated by his vast wealth. If it’s that bad, says Simon Kelner, why not just give it all away?
Euro 2016: Chris Coleman on course to end half a century of hurt for Wales

Coleman on course to end half a century of hurt for Wales

Wales last qualified for major tournament in 1958 but after several near misses the current crop can book place at Euro 2016 and end all the indifference