Outlook: Why business is wrong about rates

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The Independent Online
THAT BEWILDERING - and growing - Dad's Army of industrialists warning that we're all doomed unless somebody does something about interest rates has evidently gone unheeded at the Bank of England, and rightly so. What do businessmen mean when they urge Tony Blair to "recapture control of the UK economy"? Do they really want financial markets out of the saddle and the politicians back in it? Surely not. Their rantings are beginning to sound as unrealistic as they are misguided.

The latest Inflation Report, which reflects the consensus amongst the nine members of the MPC, puts the risk of economy-wide recession next year at just one in eight, compared to a one in three risk of inflation rising to the level - 3.5 per cent and over - that requires the Governor to write a formal letter to the Chancellor explaining the Bank's failure to meet the Government's inflation target.

The Bank's new inflation forecast is far more pessimistic than the May forecast, as well as being more realistic in recognising that now, as in every business cycle downturn, inflation will continue to climb long after the economy has begun to slow. In any case, a slowdown in growth is not a recession, though perhaps ominously, the Bank does recognise for the first time in its latest inflation report the possibility of recession in its worst case assumptions.

Manufacturing is at the sharp end, worse affected by the strong pound and Asia's troubles than other sectors of the economy. But interest rates have to be set according to the average, not the weakest area of growth. The doomsayers deserve every sympathy, but they must certainly not have the last word on monetary policy.

Yet while it is safe to conclude there is going to be no early cut in the cost of borrowing, it would be rash to assume another increase is definitely on the cards. For as the quarterly report also makes clear, output growth is slowing sharply even if outright recession is unlikely. The message is that the business cycle has not been vanquished. The boom was not as big as the last one, the bust will not be as bad, but the British economy cannot avoid an episode of slower growth and higher inflation.

The Report therefore lays the groundwork for the Governor to argue that it is too late to bring inflation back on course in the short term. The one-in-three odds of inflation rising above the upper ceiling of the inflation target were laid before the election, even if, as the Bank now implicitly admits, it moved too slow in its early months of independence to correct the problem.

Even so, the MPC should not be worrying too much about milk already spilt. Instead it should concentrate on the future. Its decisions now will not be reflected in the inflation figures for another two years. That is about how long it takes for the pace of economic activity to affect prices all the way down the chain to consumers.

Getting the message across about the need to run monetary policy pre- emptively is tricky. It has not been made easier by the fact that the MPC has been somewhat behind the curve for much of its existence. It should have been raising rates more aggressively last year, despite low inflation, as growth was well above trend.

Luckily, the next phase of the cycle is the one where pre-emptive steps will be popular, where rates ought to fall even if inflation is rising. The minutes of July's MPC meeting, also released yesterday, suggest that the debate on the MPC is actually as strongly divided as ever even though the Bank of England Nine opted, wisely, to vote unanimously for the record.

The next move in interest rates is still in the balance, and will depend on all the usual factors: how fast growth slows, how robust the pay and unemployment figures turn out, and whether the pound falls significantly, over the rest of the summer.

The doomsayers of industry are wrong in their claim that rates should already be falling - and equally wrong in leaping to the conclusion that the Bank is determined to make loans even dearer whatever the cost to industry. Winning the war against inflation is a subtler business than that, and the gloomy rhetoric of the Institute of Directors and the many industrialists who complain about the strong pound and high interest rates does no real service to the British economy.

Classic Murdoch move at BSkyB

THOSE IN the City who thought Rupert Murdoch, with Asian troubles and a soaraway Fox success story in the US to occupy his time, was starting to take a back seat in the affairs of BSkyB, should think again. Yesterday's aggressively priced product offering for the company's digital launch this October was classic Murdoch.

In its approach and intentions, the package is strongly reminiscent of his price cutting strategy in British national newspapers. No wonder shares in Michael Green's Carlton were hit by the announcement. Carlton is a 50 per cent shareholder in Sky's upstart pay TV competitor , ONDigital, and Sky's latest initiative sent as clear a signal as they come - Mr Murdoch is not going to sit idly by and allow digital terrestrial to erode its dominant position.

One by one, Sky is addressing the supposed advantages of digital terrestrial over digital satellite. It has long been hard to see just what these were supposed to be, since the backbone of ONDigital's programming package was always going to be provided by Sky's sports and movie channels. Even so, ONDigital promised differentiation as a limited, cheap and cheerful digital pay TV offering set against Sky's 200 channel Rolls Royce product. Furthermore, you wouldn't have to buy and install a satellite dish to receive it.

All that now appears to have gone out the door. Last month Sky announced free dish installation for those taking its digital services. Now it's come up with a price competitive programming package which on the face of it is bound to be superior to what ONDigital can offer - if only because for round about the same price there's a lot more of it. There will always be a quite sizeable market out there of those who cannot or will not have a satellite dish on the outside of their house, but if ONDigital is not careful, it may find that this is its only market. Whether that's big enough to sustain the operation is anyone's guess.

One thing is clear. Rupert Murdoch is determined to keep his new competitor in the position of no more than parasite feeding off the pig's belly.

Ritblat spots his chance to move

JOHN RITBLAT, that consummate survivor of the British property scene, is rarely out of the headlines for long and yesterday he was back with a vengeance. The City was left guessing over his intentions after he emerged as a 3.2 per cent shareholder in Selfridges, the Oxford Street store.

Newly demerged from Sears, Selfridges has long looked like a better property than retail play. At the time of its listing it virtually admitted that if it had to pay a commercial rent for its Oxford Street property, it would barely be profitable. With the shares trading below net asset value, Mr Ritblat has spotted and acted on this obvious potential. Whether he can persuade management to act to realise that value without making a full scale bid is another thing.