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Be sceptical of those who impugn the Old Lady’s virtue


Like Caesar’s wife, the Old Lady of Threadneedle Street is supposed to be above suspicion. But some members of Parliament have suspicious minds.

The Conservative Mark Field and the Labour MP John Mann have alleged that the Bank of England’s Governor, Mark Carney, has entered into a bargain with George Osborne to keep interest rates low until after the General Election.

It’s of course possible, even likely, that the Chancellor would prefer the Bank to keep rates on hold until after next May. The Bank released some forecasts last week showing what, in its view, would happen to growth if its main policy rate remained rooted to record lows of 0.5 per cent over the next nine months or so. Under this scenario, growth accelerates from the present rate of 3.2 per cent and hits an annual rate of around 4 per cent in the first quarter of next year. But if interest rates are lifted before next May, in line with market expectations, annual GDP growth would moderate to just 3.3 per cent.

Could the difference (and the accompanying boost to consumer confidence) push the Conservatives over the finishing line in first place next May? Would the first rate since July 2007 pique the electorate, nudging swing voters to punish the Coalition parties in the voting booths? Who knows, but it’s the kind of calculation many chancellors, facing an election, have made in the past.

That’s certainly a more plausible thought process than the Treasury spin line that an early rate rise would be “a sign of success” for the economy. One suspects there are unlikely to be many people saying “oh good, my monthly mortgage repayments have gone up – that’s a welcome sign of success”.

Yet the fact that there’s a motive for the Chancellor to lean on his Governor over the timing of rates does not prove the case of the accusers. And there are some strong reasons for being doubtful.

The practical difficulties stand out.  The Governor does not set rates alone, but as part of a nine-person Monetary Policy Committee made up of a mixture of Bank executives and external appointees. The Chancellor would need to suborn not just Mr Carney but eight of his colleagues if he wanted to ensure rates did not rise.

There have been some mutterings in the City over the “monotone” quotes emanating from MPC members over the past year in media interviews. And no one seriously doubts that Mr Carney is primus inter pares on the committee. Yet it’s still a stretch to imagine that the Governor can bend his MPC colleagues at his will.

One should look at actions rather than words. The limits of Mr Carney’s personal power were underlined in the original form of his Forward Guidance on rates adopted last summer. This set an unemployment threshold of just 7 per cent – higher than the 6.5 per cent target being used by the US Federal Reserve and, one can reasonably assume, higher than the dovish new Governor would have liked. It’s pretty obvious that there was MPC pushback to a strong form of forward guidance. And one external member, Martin Weale, even dissented from the relatively weak form of guidance that was adopted.

More evidence may come this week if minutes of the August MPC meeting show that some members have started voting for rate hikes.

At the Canadian central bank, Mr Carney’s previous berth, the Governor does, effectively, set rates alone. A political bargain in that context might have been conceivable. But things are different here.

Individuals, even central bankers, are inherently weak. But that’s precisely why we have institutional checks and balances. And the institutional arrangements of the Monetary Policy Committee, put in place by Gordon Brown back in 1997, offer a pretty robust barrier to political interference in interest rate decisions.

Cracking the enigma of executive pay

On the subject of good policy design, plaudits should go to Vince Cable for his requirement that listed companies publish a consistent “single figure” for the remuneration of chief executives in their annual accounts.

Previously, journalists had to plough through pages of opaque remuneration reports as they attempted to tot up all the various bonuses and share options awarded to bosses. This made the code breaking activities of Bletchley Park feel like light relief. But the new reporting requirement removes a good deal of the complexity. The resulting data has this week enabled the High Pay Centre think tank to analyse the gap between the pay of top FTSE 100 bosses and the rest of the employees in their organisations. It has found that the average chief executive receives 143 times as much as the average worker.

So does that massive gap represent the relative productivity of employees? Or is it rent extraction by excessively powerful bosses? Let the (informed) debate begin.