This could be a backward step for the Bank
Thursday 27 February 1997
There will be Mr Brown on one side with his council of economists to advice him. On the other will be Eddie George, or whoever replaces him when his contract comes up for renewal in May 1998, advised by a monetary committee only half of whose members will be drawn from the Bank of England's existing staff. The rest will be outsiders, though the Bank has managed to persuade Mr Brown they should at least all be acknowledged experts in the field of monetary policy. Technically these four will be Bank of England appointments. In practice they will be Mr Brown appointees, for in the real world the Bank is unlikely to opt for anyone the Chancellor doesn't approve of.
At this juncture it is hard to tell whether any of this is much of an improvement on the present arrangements. The City is certainly right to believe that in practice they may well not be - that they could mark a retreat in progress towards full Bank of England independence rather than an evolution towards it. This is why. Bolstered by his council of eminent economists, it will be much easier for the Chancellor to ignore or sideline the Governor's advice on monetary policy. If the Chancellor disagrees with the Bank, he can point to his council and claim they are more right than the Governor.
Moreover, the formation of a monetary committee half-staffed by outsiders risks homogenising and diluting the advice he gets from the Governor. The idea of having the outsiders is a reasonable one in theory for it is intended to make the Bank's advice on these matters more representative. The concern with advice as presently formulated is that it is determined by too small a clique of Bank insiders, who are unduly influenced by the prejudices of financial markets.
There's another side to the coin here, however. At this stage in Britain's attempt to throw away the habits of a lifetime and establish credibility as a low-inflation economy, it is actually necessary for the Governor to be hawkish in his views, to err constantly on the side of caution and to advise strongly against risk taking in monetary policy. The outsiders are likely to be more balanced and doveish in their approach, if not quite as reckless as some in the City fear they may be. It can readily be seen that the effect of the two initiatives - council and committee - may well be to produce a dangerous, Treasury-inspired fudge in decision-making. Indeed it is entirely reasonable for the City to suspect that this is actually Mr Brown's intention here.
All that guff about the Bank needing to "earn" its independence, as if the Bank is more likely to play fast and loose with monetary policy than the Treasury, is actually code for saying by all means let's have an independent Bank, but not yet. These arrangements are no substitute for an independently determined monetary policy. They should be seen for what they are - a clever way of perpetuating the status quo and for rooting power where the politicians like it to be - firmly in their own hands.
Lord Weinstock's missed chance
As Lord Weinstock, former managing director of GEC, settles into retirement, there will be one regret that continues to play on his mind - why on earth didn't he buy British Aerospace five years ago when he had the chance? So bombed out and distressed did the company then seem, that he probably could have picked it up at little more than pounds 2 a share. Furthermore, the company was in such a parlous financial state, that he could convincingly have argued that without him there was a fair chance of the company going under - in other words that the Ministry of Defence and the competition authorities should lift their objections to the creation of such a defence monster for the sake of safeguarding jobs and technology. Quite why he didn't will have to await the judgement of the several biographies now being written on the great man. Whatever the reason, it was, with the benefit of hindsight, a quite spectacular piece of ill-judged caution. British Aerospace shares now trade at more than pounds 12 and the company has earned a well-deserved reputation as the golden boy of the European defence sector. Luck and politics have played a fair part in that transformation. Barely a day goes by when Sir Richard Evans doesn't thank his lucky stars that he sold Rover to BMW, thereby off-loading what would now be a huge problem were it still in the BAe stable. But there has also been hard graft and painful decisions.
The challenge for the future is going to be to build on this success in what continues to be a rapidly shrinking world defence market. Pushing through the incorporation of Airbus is only a small part of the restructuring that BAe now needs to spear head in Europe's still fragmented and deeply inefficient aerospace industry.
Of `superwomen' and super-bears
British fund managers outperformed most of the main indices last year, yesterday's annual WM Company survey reveals. But the margin over funds that track the index was rather small.
So small that it makes a very unimpressive justification for the cost of an army of highly paid Nicola Horlicks in the active pension fund management industry.
For example, the survey found that in UK equities the average return was only16.8 per cent, a tiny margin over the 16.7 per cent gain for the FTSE All-Share index. Nevertheless, it was still a good year for many active managers, particularly the smaller funds, whose stock-picking skills took them well ahead of the UK index. There were some misses.
For example, most fund managers looked a bit silly by reducing their exposure to the US market, which promptly took off again instead of the predicted collapse. But WM Company takes a long-term view of this apparent mistake.
"There may be a parallel in Japan during the late 1980s, when funds were left significantly below index weight by selling into the rising market," said Peter Warrington, a director.
"When the Japanese market corrected, this proved a wise strategy. Many expect the same situation to be demonstrated in North America shortly."
The other mistake made by some, to move out of UK equities too early, was not repeated across the market. There was only a gradual rise last year in cash holdings. The super-bears like PDFM will eventually be right. But for UK stocks, it is hard to make a case that their timing was wise.
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