Comment: Politics versus logic in the battle for the Bank
Thursday 28 March 1996
Precisely when the Bank will choose to stand its ground is hard to predict. If it believes that there are bigger fights to come, it probably won't be at this next meeting. But at some stage it will, putting the present monetary arrangements to the test once again. Kenneth Clarke has already ignored the Governor's advice once before. On that occasion he got away with it. Eddie George was proved wrong. So it could be argued that it is the Chancellor's judgement that we should all trust, not the Bank's. Mr Clarke is unlikely to be lucky twice, however, and if he goes against the Bank again, the credibility of the present monetary arrangements will be called into question once more.
Does this matter? With an election looming, the Chancellor won't be worrying too much about credibility. Whatever the markets may think, the electorate on the whole doesn't care a fig. It has yet to be educated into the virtues of an independently determined monetary policy. Outside the markets, interest rate cuts are nearly always popular, whatever their motivation. Certainly the politically inspired rate cut is a long way from being a thing of the past. One of our leading tabloids already has the headline ready for when the Chancellor does it. "Belt up Eddie", the headline will read over a glum-looking Eddie George in the back of his car.
Kenneth Clarke is more sympathetic to the Bank's case for full independence than most of his Cabinet colleagues but even he is not wholly for it. As for the rest, an independent central bank smells too much of things European to even be considered.
Ironically the Bank may stand a better chance with Labour, which on paper at least is as opposed to full-scale independence as the present government. Even among New Labour there is a tendency to regard the City as a state within a state, something that acts in its own greedy interests rather than those of the country. Rightly, Labour has argued that if the Bank is to have greater authority in deciding monetary policy, then those that decide it within the Bank should be a more representative, less City-orientated lot. A monetary committee, with outside members, would be established and its deliberations published.
While the ultimate decision on interest rates is taken at the Treasury, however, the proposal suffers from a fatal flaw. Regardless of what the majority of the committee decides, the Chancellor would always be able to go along with the published view of the minority if it better suited his purpose. The Bank would as a consequence have even less power than it does at present. As things stand, its position on rates, although it may be wrong, is at least a non-dissenting one.
The quid pro quo for a more representative Bank, therefore, should be a more independent one. If there is to be a formal, representative and answerable monetary committee at the Bank, it also needs to be fully in control of interest rate decisions. That is the logical conclusion to draw from Labour's policy. But then logic never did have much to do with politics.
A good effort from Sir Geoff
It's time for an end-of-term report on Sir Geoff Mulcahy, chief executive of Kingfisher. A year ago, fresh from a calamitous profits warning and a boardroom clear-out, Sir Geoff descended into the hot seat to sort out the mess, particularly at Woolworths and Comet. He was judged too valuable to walk the plank himself and the City gave him the benefit of the doubt, waiting to see if he could re-work old magic. One year on, how has he fared?
The short answer is not bad, about seven out of 10, in fact. His cap may not yet be titled at a jaunty angle but there is reason for some spring in the step. Good progress on most fronts has only been marred by the occasional lapse in concentration.
Woolies gets a gold star and has lived up to its promise with higher sales and profits. It is difficult to argue with like-for-like sales growth of 6 per cent and an increase in margins. Comet gets good marks for improvement after being dragged back from the abyss. It is making a profit of sorts, although the operating margin is still only 0.5 per cent.
The weakest subject is clearly woodwork - B&Q to you and me. Here, the market may ride to Sir Geoff's rescue. Boots and WH Smith may soon bite the bullet on the loss-making Do It All and either sell or close some stores, helping all the other players. Who knows, Sir Geoff may even buy a few himself. Kingfisher's share price is still well short of its 1994 peak but a 50 per cent rise since last year's disasters Sir Geoff is plainly reapplying himself with vigour.
Risky moves from BT
BT is taking a risk in complaining that Don Cruickshank, the telecoms regulator, is out of step with new government policy on cartels and abuse of market power. It could get more than it bargained for.
Mr Cruickshank has proposed taking new powers in this area against BT, which the company vehemently objects to. Yesterday it pointed out the apparent inconsistencies between Mr Cruickshank and the consultative document put out by Ian Lang, the President of the Board of Trade. It would like the regulator to come into line with Mr Lang.
What BT has overlooked is an inconsistency the other way around: Mr Cruickshank does not propose draconian fines in his new rules. But the Government proposes enormous fines of up to 10 per cent of turnover in some circumstances. Does BT really want full consistency between national competition policy and telecoms regulation? Perhaps it should let sleeping dogs lie.
As for Mr Lang's proposals to toughen up the powers of the OFT to police market abuses, they are welcome indeed. For the first time, there will be a tribunal able to fine cartels, as Brussels already does. Equally important, predatory pricing and other abuses will be stopped in their tracks as they happen. As things stand, the victims of such abuse are as often as not bankrupt before the OFT has gone through the cumbersome procedures required.
The only problem with the reforms is that they have taken so long to appear. First proposed in 1989, a ritual soon developed in each successive OFT annual report, in which the incumbent director-general asked the Government to hurry up and carry out its promise to legislate. This time it had better be for real.
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