Dangers of a rate conflict

FINANCIAL markets have been remarkably calm since the August eruptions in China, despite the intensifying war against IS and spreading economic gloom.

But they are soon to be in for historic change. If events pan out as expected, this month will see monetary policy in the eurozone and United States move in opposite directions.

The eurozone is all a flutter with the likelihood that European Central Bank president Mario Draghi will step up Frankfurt’s bond buying beyond the current €60bn a month.

There are technical obstacles to overcome, such as the fact that ECB negative interest rates are currently set at -0.2pc and German bonds yield -0.4pc. This would make it impossible for the ECB to buy more German bonds to pursue quantitative easing because there would be a potential loss.

So in the crazy world of negative interest rates the ECB may have to reduce its deposit rate to -0.4pc at least. Nevertheless, the direction of travel is clear.

Meanwhile, in New York everyone is getting excited about the prospect that the Federal Reserve, the US central bank, will move its key interest rate up from the present 0-to-0.25pc range to 0.25pc-to-0.5pc after nine years at rock bottom.

Former Fed vice-president Alan Blinder suggests in the Wall Street Journal it could be on a very slow train to 3.5pc, moving at a pace of one full point a year. The foreign exchanges are already anticipating the divergence, with the dollar strengthening against the euro.

But can convulsions be averted? Past experience of diverging interest rates are not encouraging.

One of the main factors behind the ‘Black Monday’ crash of October 1987, when the Dow Jones index tumbled 22.8pc in one day, was a dispute between the Reagan administration and Germany over interest rates. The Bundesbank declined to join in an easing led by the Fed. The story was much the same in the summer of 1992 in the build-up to Britain’s ejection from the exchange rate mechanism, the precursor of the euro.

Tory Chancellor Norman Lamont failed to persuade the Bundesbank to lower rates in a move which might have released the pressure on sterling and other currencies seeking to keep up with the Deutschmark.

Much has changed since then. The Bundesbank is no longer in charge of German rates and gradually Draghi, the Italian at the helm of the ECB, has diluted Frankfurt influence and ploughed his own path, going the extra mile to keep the eurozone from imploding.

Conditions are now reversed with the US and potentially the UK tightening while the ECB eases.

It is never good, however, when the oarsmen in the major economic blocs in the advanced world are rowing in different directions.

Seeing red

WHEN former Labour leader Ed Miliband proposed a freeze on price rises by the big six energy firms in September 2014, share prices of the quoted companies Centrica and SSE fell through the floor and there were loud complaints from the industry that new investment would be strangled.

Miliband looked to have tapped into a deep dissatisfaction among citizens facing ever increasing energy bills and there was a genuine concern that he had hit on a theme that could carry him to Downing Street.

It was not to be, but contrast the impact that Miliband was able to make with that of the current Shadow Chancellor John McDonnell. In one of his first outings in the City of London, McDonnell, adopting his best suburban bank manager demeanour, sensibly noted that banks need to rein in pay and bonuses to prevent a return of the excesses which led to the financial crisis of 2008.

All this was unexceptional and the words could easily have come from the governor of the Bank of England Mark Carney.

What came next was more alarming. ‘ Nothing substantive has changed,’ he argued, ignoring the Bank’s recent assertion that UK banks have become safer. He then added: ‘ The same failed institutions we had before the crash, I believe are set to fail again.’

This is scaremongering on a grand scale and a script straight from the enemies of capitalism.

Remarkably, it was totally ignored by the stock market. That tells you how far Labour’s own share price has self-destructed.

American way

MARK Zuckerberg’s pledge to give away 99pc of his Facebook shares to a charitable foundation, worth a cool $45bn, is coming under some critical scrutiny because of the governance issues and his determination to retain voting control of the enterprise.

That and questions over Facebook’s tax in the UK are footling criticisms.

If only some of our home-grown billionaires would show the same generosity instead of busying themselves with ever larger basements, super-yachts and preserving wealth for undeserving offspring.

Fat chance.