The right move, without a shadow of a doubt
Wednesday 07 May 1997
The speed of Mr Brown's passage from that unsatisfactory compromise position to the present full embrace has surprised everyone, not least because up until yesterday Mr Brown always insisted that the Bank would need to earn its independence. Is this, then, policy on the hoof, policy made in haste for the purpose of grabbing the headlines and establishing Mr Brown's credentials as a great reforming chancellor? Such a momentous change, once the principle of independence is accepted, surely demands a period of public consultation and consideration before deciding on the structure to carry it out?
It is not hard to pick holes in the detail of Mr Brown plans. What is proposed is a peculiarly British approach to the problem. The Chancellor is like Tony Benn deciding on the future of nuclear power. He's gone for the made in Britain, advanced gas cooled reactor option, and the design faults are already obvious. Certainly what is proposed is substantively different to the existing great independent central banks of the world, the Federal Reserve Bank in the US and the Bundesbank in Germany. The most marked similarity is with the approach adopted in New Zealand, but should we really be looking to a country of only 3 million people to set our economic agenda?
The Government will continue to set the main parameters of policy - namely the inflation target and perhaps also a semi-official exchange rate target too. That is not the case in Germany and the US. Moreover, the Chancellor's approach is also distinguished by the mechanisms he has chosen for making monetary policy more accountable both to the Government and the country than it often is in other parts of the world.
The monetary committee that will decide on interest-rate policy will in practice be appointed entirely by the Chancellor. Four members are automatically appointed by him, the Governor and two deputy governors will eventually be appointed by him, and the two Bank of England career men will have to be approved by him. It can readily be seen that the scope for "cronyism" is quite marked. The same is true of the Court of the Bank of England where the Chancellor will be making four of his own people directors as soon as possible. The Court will then progressively be made to reflect the country's various regions and interest groups. Quite how "independent" the Bank will be by the end of this process is anyone's guess.
However, all these criticisms are nitpicking when set against the magnitude of the decision, which without a shadow of a doubt is the right one for any government, more so for an unproven Labour administration always likely to face an uphill struggle in establishing credibility with the markets. By tying his hands to an independent monetary policy, Mr Brown should be able to avoid those perennial financial crises that have bedevilled previous Labour governments, sapping them of their vitality and derailing their policies.
For John Redwood and Kenneth Clarke to say, as they did yesterday, that the new Chancellor is giving away most of his job is poppycock. Yesterday's announcement was enough of itself to take a full half-a-percentage-point off long-term interest rates, with the yield premium on British long bonds falling to within one-and-a-half points of their German equivalent for the first time in recent memory. If that's what surrendering half your job does for the economy, we'll have more of that please.
But let's not get too carried away in the euphoria of revolution. There is one obvious difficulty with the new arrangements, one quite clear area with potential for conflict - the strength of the pound. The more hawkish monetary policy likely to be advanced by an independent Bank only reinforces that strength, fighting against the economy's need and the Government's desire for a more acceptable exchange rate.
As things stand we risk returning to the dog days of the ERM, when a combination of high exchange rate and short-term interest rates perpetuated deep recession. Here the solution is in the Chancellor's hands, however. If he cools the economy with a rather tighter fiscal policy, then the Bank will be able to ease off on short-term interest rates and the pound will begin to fall back once more. The Chancellor has shown himself capable of bold and decisive action; let's hope he can follow it through in the rest of economic policy.
Capital is music to Branson's ears
If Richard Branson's foray into railways proves anywhere near as lucrative as his stab at running a radio station, then the Virgin boss, or to be more precise the bewildering web of trusts that hold his assets, can look forward to becoming richer still.
The pounds 87m that Capital Radio is coughing up for Virgin Radio must be music to Mr Branson's ears. The station was launched a mere four years ago with comparatively modest investment, and although it broke into profit last year and has done better this year, the latest figures show it losing market share in the all-important and overcrowded London radio market.
But this, above all else, is a marriage of convenience. Mr Branson's original plan was to float Virgin Radio even though history shows us that he and stock market investors do not make happy bedfellows. By selling out in exchange for a 14 per cent stake in Capital Radio he has done the next best thing, gaining access to a quoted stock without the hassle of a listing.
For Capital, the deal provides access to the new digital radio age through the nationwide AM frequency on which Virgin broadcasts. If this is the future of radio, then Capital has bought itself a seat at the table at a reasonable price that brings the wherewithal and critical mass to make a go of it.
So far, so Smashy and Nicey. Where is the downside? First, Virgin has built its appeal and its advertising revenues playing contemporary rock. In order to satisfy the Radio Authority's requirement to protect both diversity and plurality, Capital intends to devote Virgin's FM licence in London to a much more specialised and narrower audience of male, hard rock fans.
Second, this is not a done deal. Although the merger will keep Capital safely beneath all the regulatory threshholds on market share, there is still a public interest test to pass and the authorities may conclude that Capital is just too big for its boots. The last time Capital applied for a new London FM licence, it was turned down. Third, Capital finds itself with a large minority shareholder on the books. Mr Branson is free to exit after two years. If by then digital radio is failing to live up to its billing, then both he and Capital could be the poorer.
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