Labour shows the way forward for the Bank
COMMENT: `Paradoxical as it seems, giving the Bank its independence is the best way to make monetary policy less arbitrary. Its independence will be required eventually in any case if Britain decides to join the single currency'
Tuesday 11 February 1997
The arbitrariness is displayed by Mr Clarke's cheerful dismissal of advice from both the Bank of England and his own officials. In fact, he has disagreed with the Bank for most of the past two years. For part of 1995 and again since last May, the Bank has been much more hawkish - and with reason if you remember that inflation has only been below its 2.5 per cent target for two months during that entire period. Now many Treasury economists have come to share the Bank's diagnosis, and Mr Clarke turns out to be ignoring them too.
As for credibility, its absence is clear in the verdict of the financial markets. The British Government has to pay a lot more to borrow money than any other European government apart from that of Greece. Nor have inflationary expectations in Britain changed very much. There is a simple way of measuring this - by comparing the yield on index-linked and conventional gilts - and it has fallen only slightly, with UK inflation expected to be above 4 per cent on a five-10 year horizon.
A new Labour government would set the Bank of England on the road to independence by introducing a Monetary Policy Committee consisting of the Governor, Deputy Governor and six directors reporting to a more broadly based Court of the Bank of England. If it worked well, the Bank would earn its independence.
Paradoxical as it seems, giving the Bank its independence is the best way to make monetary policy less arbitrary. Its independence will be required eventually in any case if Britain decides to join the single currency. But whether this happens or not, Labour's proposals would, shorn of their vagueness, be a huge improvement over the present arrangements. These have turned out not to check at all the untrammelled decisions of a Chancellor bowing to political pressures.
A broader - but sensible - range of appointments to the Bank's Court; a policy committee which could deliberate and report in secret, and therefore with honesty, but its minutes published with a delay; and ultimately an independent Bank - it is hard to see the flaw in what Labour is proposing.
If there is one, it would surely lie in the Chancellor's ability to pick and mix the advice of the monetary committee. If the committee were divided, for instance, he could chose the option that most suited him politically. The beauty of the present system is that the Governor's advice is unambiguous. That said, however, these reforms would be a clear advance.
G7 cannot hold back the tide
There was something Canute-like about the cheery statements from the finance ministers who emerged from the G7 meeting this weekend. That's great, they cried to the foreign exchange markets, but don't move any further. Like the Danish king thanking the sea for washing his toes, but warning it not to tickle his ankles, they didn't sound particularly convincing.
The G7 finance ministers were right back in April 1995, when they collectively decided to take the steam out of the yen and the mark. The slow steady rise of the dollar since then in any case reflects the healthier US economy compared with its European and Japanese counterparts. But the idea that the trend will stop here simply isn't plausible.
When credible authorities announce that the economic fundamentals demand a particular (if broadly defined) correction in exchange rates, and convincingly convey their determination to get it by intervening in the markets, then traders take note. Why waste your time betting on a rising dollar if you know the Federal Reserve and the Bank of Japan have the power and the confidence to prevent it happening?
But that is not what is going on here. For a start, the G7 ministers made no mention of co-ordinated intervention this weekend.
More important, even if the finance ministers and central bankers had discussed building a sea wall, the chances are the markets wouldn't have taken them seriously for long. The US economy is growing well, and its fiscal position is strong. Across the Pacific on the other hand, the Japanese are slowly and painfully adjusting their economy to cope with the competitive pressures of the next century. While they are struggling, the yen will remain fragile.
This may be the time for the G7 to start thinking seriously about "target trading zones" for their currencies. Sounds a bit like a global version of the ill-fated ERM, doesn't it? But actually that is the implication of what finance ministers said this weekend. They want exchange rates broadly where they are for the time being. But are they prepared to do what the markets require in terms of intervention and policy to keep them there?
This man is not the next Lord Hanson
Is this a ramp, or what? It is hard to see how the astonishing rise over the last six months in the Lanica share price can be justified, other than on a wing and a prayer. Even if Andrew Regan does turn out to be the high-achieving entrepreneur true believers think he is, even if he does manage to pull off a deal with the Co-op and follow it in swift order with others, and even if he does transform those businesses into something they are not at the moment, can he really expect to vindicate the pounds 97m of hope presently invested in the company's stock market value.
If you take the view that Mr Regan is the next Lord Hanson, then possibly. But actually, there's not much reason, so far, to think he is. For a start, he's only 31 years old, and as befits someone of that age, his record of deal making is unspectacular. Right now there's lots of noise and speculation but not much action.
First there was the bid that never was for the mail order firm Freemans. Now this Co-op business. Billed as the deal of the month in a leading Sunday newspaper, the whole thing turned rapidly to farce yesterday. As it happened, the Co-op hadn't even been approached. Letters were rapidly drafted and dispatched, but then ... well actually we don't want to sell anyway, so get lost.
Mr Regan's supporters say he's a serious guy, he's got some good ideas and backers, and one day soon he'll pull off something big. So far, there's scant evidence of it, however. This is one of those cases of the stock market's propensity to back the man, rather than the company and its business. Steer well clear, for unless you know exactly what you are doing, you'll get your fingers badly burnt.
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