Bank faces autumn test
THE original reason for bringing the Autumn Statement forward to Halloween was to steady nerves on financial markets about Britain’s fiscal settlement and to give the Bank of England greater visibility when it sets interest rates next week.
It may have been a gift to cartoonists and headline writers but not to stability.
The last thing Rishi Sunak’s government needs is a hurried, ill-thought out statement open to challenge by critics.
Moreover, if there are to be temporary tax raising measures – heavy bets are being made on raiding the banks – then Chancellor Jeremy Hunt, a more measured and serene figure than his predecessor Kwasi Kwarteng, will want to understand what is possible.
There may be a small window for windfall taxes while the banks are throwing off large profits. The ATM was running hard at HSBC, Barclays and Standard Chartered in the third quarter (as well as on the Continent).
But it is worth asking how wise it would be to take £35bn-to-£40bn from the banks over a couple of years, when the global economy is slowing and all manner of volcanoes could erupt in the non-bank financial sector. The banks weren’t made stable after the financial crisis to blow up at the first smell of cordite.
The fiasco over liability- driven investments (LDIs) in our pension funds is worth considering. It would be helpful if the Bank of England had a clearer view of fiscal policy before making its November interest rate decision next week, but the idea that governor Andrew Bailey and company are driving blind isn’t quite right.
There are any number of forecasters pointing to a £40bn shortfall in the public finances. Indeed, the Chancellor is pledging to plug it. Nor should we forget that there will be a Treasury mandarin at the Monetary Policy Committee gathering next week. Last time out, it was top economist Clare
Lombardelli, who would certainly be able to advise. Furthermore, in these nervy days on global markets Messrs Hunt and Bailey are in regular phone contact.
Indeed, Bailey was among the first people to be forewarned of the change in dates for the Autumn Statement on November 17.
The Bank has two decisions to make. It must review interest rates and decide whether to start quantitative tightening. The message from the International Monetary Fund meeting was that if central banks are going to act against inflation, better to do so decisively. Markets are expecting the Bank to raise rates by three-quarters of a percentage point from 2.25pc to 3pc. SIMILAR
three-quarters of a point rises are expected from the European Central Bank today and the US Fed next Wednesday. Failure by the Old Lady to keep to the pace could be a setback for gilts and sterling.
The Bank might be advised to move cautiously on its announced intentions to sell bonds back into the market. Its previous intervention to calm gilts was for financial stability reasons with the goal of preventing the LDI eruption turning into a cascade of insolvencies. Yet it was widely interpreted in some quarters as yet more money printing, as in previous market disruptions. As much as the Bank might want to demonstrate that the stability and monetary taps work independently, there is bound to be confusion. Better perhaps to wait rather than embark so soon on this year’s targeted £100bn monetary tightening.
Pricing pain
SHOULD consumer goods firms be better corporate citizens? Faced with the choice of absorbing the pain of cost increases, the likes of Reckitt Benckiser have tended to favour investors over customers.
But there is a danger. In preserving the value of super brands such as Cillit Bang, Clearasil and painkiller Nurofen and pleasing shareholders, the risk is that consumers find cheaper copycat brands – pain killers are a good example – do the job just as well.
And the risk is a permanent loss of customer loyalty. Basic economics tells us that if you lower, or at least maintain, the price (in an inflationary environment) then demand for the product should increase.
So far the big players – Reckitt, Unilever and Nestle – have chosen to move in lockstep by passing on costs.
When Reckitt finally finds a chief executive, maybe he or she should break ranks and put the consumer first. The longer term gains could outweigh investor dissonance.