One small step in rates, one big dilemma for BoE
Thursday 07 August 1997
Since last month there has been more evidence of happy consumers keeping the economy bubbling at a pace of growth above its long run trend. There has also been more evidence that export orders have dropped sharply, and that will show up in actual export volumes sooner or later - probably during the autumn.
There has been nothing decisive enough to alter anybody's previous opinions about whether the economy is at risk of boom or at risk of recession. The fact that the MPC has already raised rates for two months running without any clear impact on demand therefore suggests it will do so again. Apart from anything else, the Bank will want to show forecast inflation firmly in its target band in next week's Inflation Report.
A separate, and slightly less well-rehearsed, question concerns how much it should increase rates if it is going to. One school of thought says it would be better to get the pain over with all at once so the currency markets stop looking forward to future increases. If it is the expectation of rising rates that is driving the pound higher, remove the expectation and some of the pressure will be taken off sterling.
However, if the currency markets have already priced in the expectation of, say, 7.5 per cent interest rates, it will not make much difference whether that expectation is validated in three small moves or one big one. Indeed, a big move might just be counterproductive if the markets concluded that the Bank was much more concerned about the inflation outlook than anybody had realised, and marked future interest rates and the pound still higher.
There are two advantages in sticking to smaller increases. One is that early and small rises might mean the interest rate peak will be lower than it would be otherwise, if it strengthens the opinion that the Bank is "ahead of the curve".
The other is simply that there is a lot of uncertainty about the economy. The two big events - booming consumer demand and rapidly shrinking export demand - are pulling in opposite directions and nobody has much idea how strong each will be.
The argument against quarter-point increases is that they have little or no dampening effect on consumers, particularly when so many householders are now on fixed-rate mortgages of one sort or another. But in the circumstances, it would take a brave committee to hammer industry with a big increase in its borrowing costs as well and thereby increase the risk of tipping the economy into recession some time next year. It's hard to see the MPC setting about winning the hearts and minds of the British people this way.
Sir Peter's glasnost pays dividends for the Pru
Prudential policyholders will, one day, have a lot to thank Tony Blair for. The Prime Minister's close relationship with Sir Peter Davis may well be one of the reasons for the Pru's new face of sweetness and light in the face of the pensions mis-selling scandal.
To spot the difference in attitudes, one need only compare and contrast the attitudes of Sir Peter and his predecessor as chief executive, Mick Newmarch, to this thorniest of problems .
First, there was the insistence three years ago that no mis-selling had taken place, a claim that it was happy to advertise in the national press. Then there was the admission that, yes, there may have been some problems after all, requiring the Pru to set aside an undisclosed sum to compensate a few unfortunate individuals. Finally the Pru admitted yesterday that the episode may cost it pounds 450m - twice the level of previous provisions.
All this may appear to overshadow another good six months' results from Prudential, with operating profits at pounds 442m up 19 per cent on the same period last year. Yet to take this view would be to unnecessarily separate Prudential's new glasnost with the commercial strategy enunciated for the company by Sir Peter 18 months ago.
Happily for him, and his shareholders, Sir Peter's rehabilitation of the Pru, now the subject of a rather different advertising campaign, appears to be paying dividends. And in the process, the rewards for good citizenship have begun to seep through.
Long shots for a stock market listing
Spot the business: it is prone to violent swings in profitability, it is afflicted with a star culture which results in spiralling wage bills, its best performers can command huge golden hellos, its senior managers tend not to last long and it is dominated by a handful of big names. No, not investment banking. Welcome to the world of football.
High finance and soccer go together these days. The Deloitte & Touche annual review of football finance, published yesterday, also makes a persuasive case for why neither business is terribly well suited to a stock market listing. In 1995-96, only Manchester United, of the Premiership clubs, made any serious money. The rest lost pounds 80m between them and the league as a whole ended up with a deficit of pounds 98m. NatWest Markets would be proud of them.
Three quarters of clubs in the Premier League lost money, the main culprits being spiralling wage bills, extravagant transfer fees and ground improvements.
And yet the 18 clubs which have so far taken the plunge and joined the stock market now have a capitalisation of pounds 1.36bn which puts some of them on a rating which would make the eyes water even in a biotechnology company.
Fortunately, reality, or perhaps sanity is beginning to sink in. Anyone with a spare pounds 1,000 could have doubled their money if they had invested it early last season in the six clubs that were then listed. By contrast, the six flotations since the end of March this year have all fallen below their issue price.
Football, like merchant banking, is, as they say, a funny old game. Hard to predict and harder still to know whether next year will bring the jackpot or relegation.
Where investment banking has the edge on football, however, is that in bull markets everyone tends to do well. In soccer, only one club can win the League or the FA Cup.
The advent of pay TV has brought in vast sums of new money and made incomes a little more predictable. Even so, the share-out is still geared to success on the field and there remains a gulf between what the cream of the Premiership and the rest of the league can earn.
None of this will stop the most determined clubs from floating. But as food for thought, Deloitte's soccer annual makes better reading than any match programme.
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