Confident Clarke is still too quick with rate cuts
COMMENT: 'Will the Chancellor increase rates even closer to a general election campaign if it looks necessary? He insists he will but he surely doesn't expect anyone to believe him'
Friday 07 June 1996
The loser, again, is the credibility of monetary policy. Mr Clarke could well turn out to be right, again, in his judgement about the state of the economy and inflation just as he was last May. But he has still not accepted that for an inflation-prone country like Britain, interest rates need to rise faster than absolutely necessary and fall more slowly than they might. The UK still has an inflation rate just above the EU average and the financial markets still demand a premium for holding gilts. That premium rose yesterday.
The truth is that the monetary arrangements put in place after the pound's fall from ERM grace will not have passed their test until a Chancellor does something unpopular before an election. Will Mr Clarke increase rates even closer to a general election campaign if it looks necessary? He insists he will but he surely doesn't expect anyone to believe him.
Even worse from the credibility standpoint, yesterday's move has left Eddie George just one of many people who bend the Chancellor's ear about monetary policy - an important influence but perhaps not as important as John Major. We will not know for sure what the Governor's view was until the Trappist vow on what went on at Wednesday's monetary meeting is lifted six weeks hence. But from all the Governor said prior to the meeting it is obvious there must have been a serious rift.
Despite his excellent record as Chancellor, Mr Clarke's cheery confidence in his own judgement over Mr George's has strengthened the case for Bank independence. Britain's attempt to compromise between full central bank independence and full political control is looking increasingly unsatisfactory. It has turned out that embarrassment over a potential clash with the Governor is not enough to change a politician's mind.
The surprise cut also increases the odds on chunky tax cuts in the Budget. The latest Mori ''mood of the nation'' index displayed its biggest ever jump as last year's tax cuts came into effect. The Chancellor has revealed himself to be putting in place all the conditions for a healthy economic recovery before the election. With the bill in terms of higher inflation and worse public finances due well afterwards, nobody can fault him on his politics.
Are City salaries getting out of hand?
Never mind executive "fat cat" salaries, it is the City where people really make money. And way down the scale of employees, too. The year before SG Warburg was driven into the arms of Swiss Bank Corporation, the average remuneration per employee rose to more than pounds 100,000. Since the main reason for going into the City is to make money, this might not seem unreasonable. In a sense, the City's whole raison d'etre is to make people rich.
City salaries are generally not as visible as those of public company directors, but everybody knows that traders and investment bankers are paid hansomely, some of them beyond the dreams of avarice. Curiously, there has been little public concern or outrage about it as such. Typically, reaction amounts to little more than a shrug of the shoulders and the comment that since the City operates under the law of the jungle, good luck to them.
Now there is concern, however, and it is coming from bankers themselves. In recent weeks, two senior investment bankers, one clearing bank chairman, and the deputy governor of the Bank of England have all spoken out about it. The deputy governor, Howard Davies, is worried because the bonus-linked nature of large parts of City pay encourages traders to take risks. The others are more mundane in their concern. They worry that as City salaries rise ever higher, costs will spiral out of control and shareholders, who after all are the people who provide the raw material - capital - for all those rocket scientists and barrow boys to trade on, will get short- changed.
The latest to speak out is Hessel Lindenbergh. As chief executive of ING Barings, he has just had his entire Latin American equities team poached by Deutsche Morgan Grenfell. This is serious stuff, for we are talking here about a good deal more than the bidding up of salary structures. When an entire department leaves, the investment bank loses a part of itself and its expertise. Naturally it will all end in tears. In good years, investment banks seem prepared to do almost anything to get the "right" people. When the bad times come, the newly inflated cost base remains, shareholders get stuffed, and so, eventually, as sure as night follows day, do all those high-flyers that it cost so much to recruit. They end up fired.
Mr Lindenbergh is clearly right to believe things are out of hand but it is hard to know what he can do about it, other than resist the temptation to enter the beggar thy neighbour game, bring on his young, low-cost talent and hope they will eventually give his disloyal former employees a good thrashing. A key characteristic of the smart organisation, after all, is its ability to weather defections, even of whole departments, and carry on regardless.
The gas saga is not over yet
Another day, another price control review from another utility regulator. Wouldn't it be nice to pop them all in a box marked Offload, drop it in a large expanse of water and go off and enjoy a summer free from their wretched RPI-X formulas. Sadly, they now control such a large chunk of the British economy and invade so much of our daily lives that this is no longer an option.
The latest utility to feel the heat (again) is poor old British Gas. Just when it thought it was safe to come out of the woods following the TransCo massacre, along comes Clare Spottiswoode of Ofgas to clobber them on gas supply tariffs. In normal circumstances, a price control formula that further tightens the regulatory screw just as the market is being blown open to unfettered competition and robs British Gas's supply arm of nearly half its already paltry profits would be tantamount to a declaration of war.
But it is a testament to just how effectively the company has been softened up by her review of transportation charges that it will probably accept the latest Spottiswoode package and thank its lucky stars for getting off so lightly.
Even then it is not the end of the story. Next month we will be entertained by TransCo 2, the final proposal. Then for those with the stomach for it, there is the forthcoming National Grid transmission review to spruce up September.If you, dear reader, are feeling a little punch-drunk, spare a thought for the utilities. One almost begins to feel sorry for them.
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