Still Some Growing Up to Do on Interest Rates
Hosking, Patrick, The Independent (London, England)
SHOULD HE, shouldn't he? The air has been thick with industrialists and financiers telling the Chancellor he shouldn't raise interest rates. Martin Laing of the construction group John Laing, Jon Foulds of Halifax Building Society and Peter Ellwood of the TSB all spoke out last week about the dangers of lifting rates.
Well, they would, wouldn't they? Anyone whose business is dependent on the moribund housing market is particularly anxious to keep rates low.
But this view is not confined to builders and mortgage lenders. I couldn't find a single industrialist last week who believed the Chancellor should hike rates right now to tackle inflation.
Even those companies with big cash piles, who would therefore be net beneficiaries; even those hedged against higher borrowing costs; even the most hawkish on inflation - they shrink from actually suggesting the bullet should be bitten at once. On Thursday, the CBI added its voice to those lobbying for no change.
Yet it is those same companies, showing a virtuoso capacity for doublethink, which are daily reporting alarming signs that inflation is just around the corner.
With the interim results season in full swing, there is barely a company that isn't reporting a surge in the cost of semi-processed inputs. Woodpulp prices have rocketed by 50 per cent since the beginning of the year. Breeze blocks and some other building materials have gone up by almost as much. Steel costs 20 per cent more. Ethylene and polyethylene - basics for plastics manufacturing - are up 25 per cent. Inflation is on the way back, as Friday's alarming news on US factory gate prices amply demonstrates.
True, consumer demand could be perkier, but Kenneth Clarke may well rue not raising rates last week after his meeting with the Bank of England Governor Eddie George. Politically, it was his best chance. October will be awkward because of the Tory party conference. November will be difficult because of the Budget, when the Government will have to confirm fiscal bad news, including the doubling of VAT on domestic fuel. Then comes the Christmas run-up, when he will be under pressure not to rock the boat.
An early and small rise in rates is surely preferable to a later, large and panicky series of hikes. The time lags are so long that rates need to be raised at the first sign of price pressures. Politicians and central bankers have supposedly become more grown-up about interest rates. There is meant to be less shame about raising them - none of the old childish embarrassment about putting on the brakes and spoiling the party.
Alan Greenspan at the US Federal Reserve has shown it is possible to lift interest rates without the skies caving in (though there were bruises in the bond market). He's now done so five times since February and another hike is on the cards.
But Messrs Clarke and George, for all their reassuring words, for all the publicity surrounding their sensible monthly meetings, have not actually ever lifted rates by so much as a solitary basis point. Until they do, the suspicion will remain that they are still in short trousers. Business leaders, alas, are hardly encouraging them to grow up.
Banking on derivatives
EDWIN ARTZT, chief executive of the American consumer products group Procter & Gamble, has asked to have $100,000 cut from his annual bonus. The gesture - it's hard to call it much more when Artzt's pay will still rise 8 per cent to $2.3m this year - was because of the embarrassing $157m P&G dropped after speculating in the high-risk derivatives market.
So far, there's no sign that his counterpart at Glaxo, Sir Richard Sykes, plans similar self-flagellation. Glaxo last week put a pounds 115m figure on the losses it sustained investing in gilts and derivatives earlier this year. …