Carney takes the controls
AT a moment of extraordinary political uncertainty, someone needed to show that they were in charge of the clattering train.
Having been accused by some Leave campaigners of exceeding his mandate during the referendum campaign, Governor of the Bank of England Mark Carney was at pains to say he was acting within his statutory powers in pledging to keep a weather eye on the economy in July and August when ‘monetary policy easing’ is likely to be necessary.
His analysis was a world away from a year ago at Lincoln Cathedral, when Carney sought to prepare the nation for a rise in interest rates at the turn of 2016.
Conditions have changed dramatically. Carney noted the survey evidence showing a sharp downturn in commercial and residential property and business investment before the referendum.
He now believes that given the current uncertainty reflected on the currency markets, where the pound has fallen by over 8pc, conditions will likely worsen.
The Bank has taken preventative action to ensure financial stability. It created a special £250bn credit facility and a promise to provide the financial system with emergency funds over the next couple of months, so the pipes through which lending to consumers and businesses flow do not need the Cillit Bang treatment.
The strongest signal central banks can send to consumers and businesses is to cut interest rates. But when the bank rate is already is at 0.5pc, as it has been since 2009, there isn’t very far down to go. A reduction by a quarter of a percentage point in July to just 0.25pc must be on the cards. Those listening carefully to Carney will also have recognised that he is less than keen on the negative interest rates that now exist in Denmark, Switzerland and at the European Central Bank. Below-zero rates are intended to encourage the public and firms to spend rather than save.
They can (as is evident in the eurozone) have a deleterious impact on High Street banks, weakening their ability to make profits and accumulate capital.
That would suggest that the Bank stands ready to adopt more unorthodox monetary policy by buying assets. It could do more quantitative easing by buying government bonds in exchange for cash – a form of money printing.
More radically, it could take other assets such as mortgage securities or corporate bonds onto its books. One of the few good things to flow from the financial crisis is that central banks learned to be creative in combating turmoil and slump. Carney joshed at the start of his speech: ‘Will the financial system do its job? Will I keep mine?’ One hopes so: cometh the hour, cometh the man.
Paper tigers
THE London Stock Exchange and Deutsche Boerse are in full cry, assuring anyone who asks that the shareholder vote on the £21bn merger scheduled for Independence Day on July 4 will go ahead despite Brexit. The originator of the talks Deutsche chairman Joachim Faber, assures the Wall Street Journal that nothing will get in their way. He has received support from the British chief executive of Deutsche Bank, John Cryan, who has a vested interest as one of the German exchange’s advisors.
Cryan might have been better employed thinking about how his bank is ever going to pass stress tests in the United States or accumulate sufficient capital to satisfy toughened regulatory requirements for overseas lenders.
The Deutsche-LSE ‘merger of equals’ always carried with it enormous political risks. These have been increased immeasurably by the Brexit vote. German regulators and politicians have expressed their reservations about the proposal that ‘Topco’ – the headquarters of the exchange – will be in London. And with many in Europe seeking to extricate euro trading in London as a penalty for the Leave vote, the commercial logic of the transaction is diminished.
There are a series of regulatory issues to be resolved, including the right amounts of capital to be held by the respective clearing houses Euroclear in Frankfurt and LCH Clearnet in London. Both exchanges are increasingly responsible for handling billions of euros and pounds of swap and other transactions that used to be conducted across the counter by the investment banks.
In the background Euronext, the Paris-based cross-Europe exchange, doesn’t much like the idea of being totally dwarfed by a bigger rival.
All those involved have huge vested interests in pushing ahead. The army of advisers are licking their lips at the prospect of £235m of fees. They might also favour dragging out an increasingly doomed process.
If the transaction does fail then the chief executives of the two exchanges, Carsten Kengeter, designated supremo of the merged market, and Xavier Rolet (who agreed to walk away) might consider doing the honourable thing and step aside.
Too often business leaders (like football managers) wait to be pushed rather than admit a folly. It would be in bad taste to suggest that the towering figures of finance would be interested in maximising departure packages.
Eton and Oxford
SWIMMING against the tide of post-Brexit pessimism is Old Etonian boss of Dixons Carphone Seb James. The group has just opened a new flagship emporium in London’s Oxford Street filled with devices showing how in touch it is with the cyber age. It includes a ‘digital feature wall’ filled with LED screens and another surface filled with headphones, smart watches and other wearables.
Best of all, it is offering a premium service with a ‘Knowhow’ consultation space.
James has learned that in an age of increasing complexity, simply piling it high and selling it cheap (with warranties) – the old Dixons approach – ain’t’ good enough.