Another rate rise? Don't make me laugh, Mr Bean

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The Independent Online

Charlie Bean, the genial chief economist of the Bank of England, says he does not want to "clobber the consumer" with the next interest rate rise. But why not? If Mr Bean thinks interest rate rises can stop runaway high-street spending and spiralling house prices, the Bank should execute its policy violently to maximise impact.

I'd argue that the four quarter-point rises so far have had little or no effect on the things Mr Bean wants to control. Mr Bean would argue that it's too soon to tell. It takes as much as nine months for the effect of a rise to work through the system. By this logic, many small increases are not a good tactic because you have to redeploy your arsenal before you know whether the last assault has had any effect.

The crazy thing is that, despite all the indicators (such as consumer spending, house prices, low unemployment) pointing to rising inflation, it isn't going up. This is a classic case of things that should happen in theory not happening in practice.

Yet despite all of this counter-argument, it is a racing certainty we will get a 0.25 per cent increase in rates on Thursday. It is either too much or too little, and in a couple of months' time we'll be having this argument all over again.

Cool hand Luqman

There is a rather interesting debate about whether Luqman Arnold did a poor job negotiating the terms of the Banco Santander Central Hispano agreed bid for Abbey National, or a very good one.

The former argument, put about by some investors who feel there is a larger cash bid lurking somewhere, goes like this. By agreeing an almost all-share offer, the Abbey board must have known this would cause a problem for, if not a majority, a sizeable minority of Abbey shareholders. UK index funds, two of which (Barclays and Legal & General) are among the top five Abbey shareholders, and quite a few UK specialist funds, cannot hold Spanish shares. They will have to sell out, causing what is known as a "flowback" that will hold down the value of Santander shares and so the value of this bid. Small investors make up a third of Abbey's shareholders, and many will not want to own Spanish shares despite the discount wine and ham offered by Santander - a case of jamon tomorrow, perhaps. Like the UK funds, they would have been better served by a deal with a higher cash element, or a cash alternative, and argue that Luqman sold them short.

But before you advance that theory too far, look at the queue of people saying they don't want to bid. It seems the Abbey boss spoke to a couple of the more likely contenders but couldn't get any to put forward a deal even remotely as attractive. There can only be a handful of banks with the cash to gobble up Abbey. Citigroup comes to mind and maybe Wachovia. But who has the desire? By the end of this week, after HSBC, Royal Bank of Scotland and Barclays have all dampened hopes that they might bid, more people will appreciate what a fine deal Luqman Arnold obtained for shareholders.

Spanish practices

Meanwhile here's a lesson in corporate governance, Santander style. Last week Jaime, the brother of bank chairman Emilio Botin, stood down as a director. Thankfully there was a ready replacement: Javier, Emilio's 30-year-old son. He joins his older brother, Emilio Botin Jnr, and his sister, Ann Patricia, on the board.

The family connections do not end there. The bank's wonderfully titled "third vice-president" and board director, Matias Rodriguez Inciarte, happens to be the brother of the head of European operations, Juan Rodriguez Inciarte, who is being put in charge of the Abbey integration, should the deal go through.

The Santander camp argues that, as the Botin family owns only 2.6 per cent of the bank's stock, there isn't a corporate governance issue because shareholders could vote the Botins, or indeed the Inciartes, off the board. Indeed. But in practice, there is a deference to the Botin family at Santander that does not exist in any UK company. The closest example would be the Murdoch control of BSkyB, which is done through a much larger stake in the group controlled by the family and with much greater scrutiny by shareholders. No wonder UK investors are wary of holding Santander stock.

j.nisse@independent.co.uk

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