Just how low will official UK interest rates go? For the time being, it is an almost irrelevant question. The Bank of England could have cut rates by 50 basis points yesterday, or even the full 100, and still it would have made little immediate difference to underlying monetary conditions.
For all practical purposes, these remain tight as tight can be, with credit and mortgages becoming both scarcer and dearer even as official interest rates fall. Only those on standard variable rates and tracker mortgages, less than half the total, will gain any kind of benefit from yesterday's cut.
Depending on who you talk to, City economists expect base rate to fall to between 4 and 4.5 per cent by the end of the year, and then ease further to around 3.5 per cent some time early next year as inflationary pressures abate. All bets are off on what happens after that. Yet for the time being the implied easing is making no difference at all, with wholesale interbank rates still at abnormally elevated levels, and mortgage and deposit rates chasing each other higher. The traditional tools of monetary policy have become impotent.
This won't for ever remain the case. Both on the up and downside of the interest rate cycle, changes in policy always take some while to kick in. Like pulling on a piece of elastic, the weight of the economy initially refuses to budge, then all of a sudden it comes hurtling up behind.
Yet the problem is normally just that of the economy taking its time to respond. What makes it somewhat different this time is that the changes in interest rates are failing to feed through to the markets at all. The credit crisis has caused the transmission system to break down.
The Bank of England meanwhile continues to worry about rising inflation, a phenomenon which is being exaggerated by weakness in the pound. Any cut in interest rates causes the pound to tumble further, accentuating the inflationary problem.
Hence yesterday's tortuous statement from the Bank of England's Monetary Policy Committee. It is hard to recall such a long and laboured rate change announcement. The trouble with cutting rates even as inflation is rising, the committee explains, is this can lead to higher inflationary expectations which may cause actual inflation to remain above target for longer than otherwise.
On the other hand, the slowing economy will eventually cause inflation to fall back anyway. Those poor people on the MPC. We feel their pain. Rarely has the policy dilemma looked so difficult. Though the headlines proclaim the onset of a second Great Depression, the data, for the UK at least, continues to look pretty robust. GDP growth last quarter slowed, but it didn't collapse. More recent statistics suggest surprisingly resilient consumer spending and an export sector made significantly more competitive by the weak pound. Unfortunately, nobody expects these things to last.
The elephant sitting in the corner of the room is the housing market, which the MPC statement contrives not to mention at all. This is perhaps not surprising, for house prices have become the issue that dares not speak its name, among policy makers at least. Nobody knows how far they might fall, or what effect this will have on confidence and consumption.
However, the best guess remains that Britain will broadly mirror the US experience, with a steep decline in house prices leading to a mild recession towards the end of this year and into next. I wouldn't have said that six months back, but then like everything else in this unfolding crisis, the severity of the mortgage famine was unanticipated.
Tesco loses director over libel spat
It rarely pays for big consumer-facing organisations to take on the media, so Tesco must have thought long and hard before issuing a writ for libel against The Guardian newspaper. To make matters more awkward still, Carolyn McCall, chief executive of Guardian Media Group (GMG), is a non-executive director of the very organisation which is now suing her newspaper.
Yesterday she resigned her Tesco directorship, citing conflict of interest. The chairman, David Reid, expressed "regret" at her decision, yet he plainly wasn't so regretful that he was persuaded to withdraw the writ.
The subject of Tesco's complaint was a series of articles which claimed that the company had used an elaborate corporate structure involving offshore tax havens to avoid up to £1bn of corporation tax on property sales. According to Tesco, it repeatedly tried to explain that the allegations were wrong, and that there was therefore no story, but The Guardian ignored these rebuttals and ran the pieces anyway. A right of reply was subsequently offered, but no adequate retraction.
Tesco claims its reputation has been badly harmed by the articles. Some customers have vowed not to shop at its stores again, while the company has been branded a tax avoider in some quarters. A number of apparently influential people have preferred to believe The Guardian's account over the company's denials. In the circumstances, Tesco felt it had no option but to sue.
I hold no torch for The Guardian, a commercial rival of this newspaper which seems sometimes to have an overtly anti-business agenda running deep within its culture and journalistic values. Unless Tesco is lying, the articles seem to have been at best disingenuous.
Yet they may also contain a tiny element of truth. Tesco doesn't dispute that the use of the structures referred to reduced its stamp duty liability, though it does claim Her Majesty's Revenue & Customs were fully aware of this. The amounts involved were also tiny compared to the £1bn claimed.
The detail of the articles was completely wrong, but the substance was in a so-whatish sort of way marginally correct. Amusingly, it has subsequently transpired that GMG has used the exact same techniques to avoid stamp duty.
All the same, what is Tesco, a company whose self-evident success as a business depends not just on being competitive but on maintaining public goodwill, doing using any kind of a synthetically designed structure to avoid tax? Big companies avail themselves of these schemes because the complexity of the tax system allows and almost invites them to do so.
Certain types of avoidance have come to be regarded in big business as completely legitimate tax planning. Yet though use of Cayman Island letter box companies might be viewed as entirely reasonable practice in the rarefied atmosphere of the boardroom, few ordinary people regard it in that way. Any form of tax avoidance carries a risk of reputational damage.
The other danger of resorting to the courts is it allows the media to present the company as bullying and vindictive, as indeed The Guardian now does. Tesco is thereby made to look like a pastiche of the way it is portrayed by critics – monopolistic, heavy-handed and determined to snuff out all opposition. It's usually a mistake to sue, but if The Guardian won't acknowledge its mistakes, what can Tesco do? There seems to be arrogance on both sides.
It's winter again on the high street
Sir Philip Green, the Bhs and Top Shop retailing tycoon, says he's experiencing some of the toughest high-street conditions he's ever known. Meanwhile, DSG International, owner of Dixons and Currys, has been forced to issue its second profits warning in three months. Everyone predicts worse to come. Right across the retail world, chains are putting store expansion plans on hold and thinking about how to slash labour costs. Retailers are always in the vanguard of any economic slowdown. If they haven't felt the chill already, they will soon.Reuse content