COMMENT: Rates weapon powerless to cure currency woes

"Currency intervention, we know from bitter experience, can achieve little when pitched against a market in full cry."

The Bundesbank has once again caught the markets napping. Surprise, it well knows, is a powerful weapon in economic as well as military skirmishes.

What is not surprising is the justification it offered for the cut in rates. The Bundesbank insists the decision was taken on domestic grounds, not to help the Americans or Europeans out with their little spot of currency difficulty. We should believe them.

Before this last cut, German rates had fallen by 1.25 per cent since the beginning of last year while American rates had doubled. This is a big change in interest rate differentials by any count. And yet it did precious little to abate the rise and rise of the mark.

By that token, we should not expect this latest cut in rates to bring about any major reversal of the dollar's decline. After all, the Federal Reserve ducked its chance to do something on Tuesday. And there has been no shortage of signals from the American side that the next move in US rates could be down rather than up. Meanwhile, the Bundesbank's cut was generally greeted as marking the trough in the interest rate cycle in Germany.

All this leaves the cause of exchange-rate stabilisation looking distinctly sick. Currency intervention, we know from bitter experience, can achieve little when pitched against a market in full cry. The Bank of Japan has been the latest to learn that in its fruitless attempts to keep the yen in check. Interest-rate changes, even if they could be co-ordinated, seem just as impotent. As for schemes like a global tax on the currency markets, they will have to await a global government.

That does not mean governments are powerless to address the problem of exchange-rate instability. What it does mean is that causes of dollar weakness and mark and yen strength go well beyond the capacity of the monetary authorities to redress. When the US starts to tackle its yawning balance of payments deficit and Japan begins to adjust its surplus, then we will know they are getting serious. Until then, currency markets are likely to continue to overshoot the underlying realities.

Winners and losers at North West Water

North West Water's ingenious and supposedly pre-emptive set of measures for sharing the benefits of enhanced efficiency between customers and shareholders looks a bit too clever by half. As a public relations exercise it might have had some merit were it not for the fact that almost anything water companies do is greeted with a high degree of scepticism; bar cancelling dividends altogether and putting water back on the rates, customers are never going to be satisfied.

Nor was the City impressed by North West's apparent show of altruism. It is always possible that the whole thing is an accounting con, but assuming that what North West is doing is genuine, one of the cornerstone principles of utility privatisation is being breached. This is the principle that customers get their deal from the regulator at the time of the periodic review; anything else the company is able to deliver by way of enhanced efficiencies goes to shareholders.

Other water companies - notably Thames and Welsh - have been dogged in adhering to it. In the US, utility price control tends to be based on return on capital; the reason the British system of predetermined targets was thought an advance is that it gives managements an incentive to cut costs and improve productivity. Admittedly, North West is an exceptional case. It faced a disproportionately large capital spending programme at the time of privatisation and has been able to achieve above-average savings on that programme - some £400m in total. The £36m a year being shared between customers and shareholders is arrived at by calculating the notional saving in bank borrowing costs on the £400m.

Customers get a further benefit from the £180m discretionary investment programme North West has announced for the next five years. Since companies are not allowed to earn a rate of return on any spending over and above that agreed with the regulator, this again is something that must come straight out of bottom-line profits. Together with the rebate, shareholders are losing out to the tune of £270m - this, not under pressure from the Government-appointed regulator, Ian Byatt, but because, in its own words, the company wants to position itself as "socially responsible and to an extent self-regulating".

With the possible exception of Yorkshire, it seems unlikely others will follow North West's lead. Even if they could afford it, what do they gain? The public relations effect of the rebate is soon forgotten and the discretionary investment spending is barely noticed at all. Better perhaps to wait and see what Ian Byatt's successor or an incoming Labour government is going to do first. Just in case any of them were thinking of raiding the larder before then, Mr Byatt yesterday delivered one of his warning shots across the bows, cautioning against excessive dividends. Whether by means of self or outside regulation, it looks as if the days of milk and honey for investors in the water industry are over.

British Aerospace in fighting form

Judging by yesterday's dusting-off of British Aerospace's trombone rights issue, Dick Evans, chief executive, obviously thinks he will be cleared to bid again for VSEL. Let's assume GEC will also be allowed to bid, and that the battle will recommence where it left off. In that case, it is clear that the breathing space since the reference has tilted the playing field in BAe's favour.

Three months ago, BAe looked weak and desperate for cash. There are obviously benefits from becoming a prime naval contractor at a time when there are some juicy new orders around. But there was also a suspicion that the bid for cash-rich VSEL was as much a disguised rights issue as a serious industrial strategy.

Amazing what a few months can do. Around the turn of the year, investors began to see BAe as turning the corner, and they took an increasingly favourable view of the clean-up achieved by Mr Evans. The last stage of the proceeds of the Rover sale came through and the cash-consuming problems of the regional jet business were finally tackled by placing them with ATR, the Franco-Italian consortium.

Investors began to talk of BAe as a serious recovery stock whose share price was supported by more than the prospect of the long-rumoured full bid from GEC. From 420p in December, it has been the other side of 500p this month. BAe still lacks the financial muscle of GEC but, other things being equal, should get a better hearing this time round.

News
A 1930 image of the Karl Albrecht Spiritousen and Lebensmittel shop, Essen. The shop was opened by Karl and Theo Albrecht’s mother; the brothers later founded Aldi
people
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmA cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Arts and Entertainment
Flora Spencer-Longhurst as Lavinia, William Houston as Titus Andronicus and Dyfan Dwyfor as Lucius
theatreThe Shakespeare play that proved too much for more than 100 people
News
exclusivePunk icon Viv Albertine on Sid Vicious, complacent white men, and why free love led to rape
PROMOTED VIDEO
Arts and Entertainment
Stir crazy: Noel Fielding in 'Luxury Comedy 2: Tales from Painted Hawaii'
comedyAs ‘Luxury Comedy’ returns, Noel Fielding on why mainstream success scares him and what the future holds for 'The Boosh'
Life and Style
Flow chart: Karl Landsteiner discovered blood types in 1900, yet scientists have still not come up with an explanation for their existence
lifeAll of us have one. Yet even now, it’s a matter of debate what they’re for
Arts and Entertainment
'Weird Al' Yankovic, or Alfred Matthew, at the 2014 Los Angeles Film Festival Screening of
musicHis latest video is an ode to good grammar. But what do our experts think he’s missed out?
Sport
New Real Madrid signing James Rodríguez with club president Florentino Perez
sportColombian World Cup star completes £63m move to Spain
Travel
Hotel Tour d’Auvergne in Paris launches pay-what-you-want
travelIt seems fraught with financial risk, but the policy has its benefits
Arts and Entertainment
booksThe best children's books for this summer
Life and Style
News to me: family events were recorded in the personal columns
techFamily events used to be marked in the personal columns. But now Facebook has usurped that
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Programme Director - Conduct Risk - London

£850 - £950 per day: Orgtel: Programme Director - Conduct Risk - Banking - £85...

Business Analyst (Agile, SDLC, software)

£45000 - £50000 Per Annum + excellent benefits: Clearwater People Solutions Lt...

Finance Manager - Bank - Leeds - £300/day

£250 - £300 per day + competitive: Orgtel: Finance Manager - Accountant - Bank...

Compliance Officer - CF10, CF11, Compliance Oversight, AML, FX

£100000 - £120000 per annum + BONUS + BENEFITS: Harrington Starr: A leading fi...

Day In a Page

Noel Fielding's 'Luxury Comedy': A land of the outright bizarre

Noel Fielding's 'Luxury Comedy'

A land of the outright bizarre
What are the worst 'Word Crimes'?

What are the worst 'Word Crimes'?

‘Weird Al’ Yankovic's latest video is an ode to good grammar. But what do The Independent’s experts think he’s missed out?
Can Secret Cinema sell 80,000 'Back to the Future' tickets?

The worst kept secret in cinema

A cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Facebook: The new hatched, matched and dispatched

The new hatched, matched and dispatched

Family events used to be marked in the personal columns. But now Facebook has usurped the ‘Births, Deaths and Marriages’ announcements
Why do we have blood types?

Are you my type?

All of us have one but probably never wondered why. Yet even now, a century after blood types were discovered, it’s a matter of debate what they’re for
Honesty box hotels: You decide how much you pay

Honesty box hotels

Five hotels in Paris now allow guests to pay only what they think their stay was worth. It seems fraught with financial risk, but the honesty policy has its benefit
Commonwealth Games 2014: Why weight of pressure rests easy on Michael Jamieson’s shoulders

Michael Jamieson: Why weight of pressure rests easy on his shoulders

The Scottish swimmer is ready for ‘the biggest race of my life’ at the Commonwealth Games
Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

The 'scroungers’ fight back

The welfare claimants battling to alter stereotypes
Amazing video shows Nasa 'flame extinguishment experiment' in action

Fireballs in space

Amazing video shows Nasa's 'flame extinguishment experiment' in action
A Bible for billionaires

A Bible for billionaires

Find out why America's richest men are reading John Brookes
Paranoid parenting is on the rise - and our children are suffering because of it

Paranoid parenting is on the rise

And our children are suffering because of it
For sale: Island where the Magna Carta was sealed

Magna Carta Island goes on sale

Yours for a cool £4m
Phone hacking scandal special report: The slide into crime at the 'News of the World'

The hacker's tale: the slide into crime at the 'News of the World'

Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
We flinch, but there are degrees of paedophilia

We flinch, but there are degrees of paedophilia

Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
The truth about conspiracy theories is that some require considering

The truth about conspiracy theories is that some require considering

For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn