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Dear Chancellor, inflation is more your fault than mine. Yours, Governor

Dear Chancellor, inflation is more your fault than mine. Yours, Governor

16 August 2006

4:53 PM

16 August 2006

4:53 PM

More interesting than the Governor of the Bank of England’s letter to the Chancellor explaining why inflation has exceeded the official target will be Gordon Brown’s reply. Mervyn King has admitted there is an even chance he will have to write the letter, and a prudent Governor would already be drafting it.

King might want to point out that although inflation is his responsibility — under the pact imposed on the Bank when Labour took office — it is nevertheless Brown who is responsible for some of the steepest price rises. While the private sector valiantly slashes the cost of electrical goods, clothing and food, the government allows council taxes to soar while the so-called regulated prices for services from rail fares to water are permitted to rise at above the rate of inflation, thus pulling up the inflation rate with them.

Of course, there are other pressures on costs, not least energy prices, but King might even push his luck by asking what the prolonged conflict in Iraq has done to keep down prices. One of the myths of the Left was that the war was all about oil — an attempt by America to grab Iraq’s reserves. If only that had been true: the surplus supply would now be depressing world prices. As it is, Iraq is mired in war, production is stalled and the rest of the Middle East has no wish to help the West by increasing output.

But if that’s a little too political for King, his letter should stick to interest rates. He may point out to Brown that the Bank raised rates this month to dampen inflation, but that the increase would not have been necessary had the Monetary Policy Committee not outvoted the Governor to cut rates in August last year. King might remind Brown that the dissenting MPC members were appointed by the Chancellor.


The key point of King’s letter ought be to ask who is running the economy, SW1 or EC2? Managing half of it from Threadneedle Street while Whitehall does its own thing is increasingly frustrating. The Governor should suggest that, having outsourced interest rates and inflation to the Bank, Brown now hands over management of the rest of the economy too, making the Treasury as redundant as the Office of Deputy Prime Minister. Alternatively, King could suggest that in future he sets targets for the Treasury.

Brown’s response will be a joy to read even if it is not a joy to write. The Chancellor might have to concede that King’s half of the economy is doing better than his own. But while the 1997 pact requires the Governor to put pen to paper if inflation exceeds the target by 1 per cent, there is no requirement for the Chancellor to answer. There may be a 50 per cent chance that King will write the letter, but what chance is there of Brown replying?

There is one part of the economy where interest rates are falling. No sooner had the Bank announced its quarter-point increase than the Student Loans Company gave notice that, for the academic year starting next month, its rate will fall from 3.2 to 2.4 per cent. On those terms we would all borrow, if only to place the cash on deposit at a higher rate — a practice known in the City as round-tripping.   

It certainly is not cheap being a student nowadays: tickets for next week’s Rolling Stones concert at Twickenham had a face value of £45 to £75 but are available through agencies at £195 to £795, and the cheaper borrowing becomes, the more people can pay. Not surprisingly, students have borrowed more than £2.5 billion.

This is not the first time the Bank of England and the Student Loan Company have moved in opposite directions: a year ago, when the Old Lady cut its rate, the student lender raised its cost of borrowing from 2.6 to 3.2 per cent. While the Bank uses interest rates to manage inflation, the student company uses the old-fashioned Retail Price Index as the benchmark for the annual fixing of its lending rate. Even more topsy-turvy is the fact that repayments on student loans are related to the borrower’s income, not the size of the loan. Just as Britain’s workforce is being encouraged to reduce its dependency on debt, the lesson being taught at universities to the next generation of workers is that debt is good. What it teaches our future economists, who knows: the learning curve is steeper than the yield curve.

The temperature in Qatar reached 108°F this week and the advice is to drink lots of water, followed by lots more. So perhaps we should not be surprised that the Gulf state’s investment authority slapped in a £7 billion bid for Thames Water last week. Qatar knows all about droughts. The home counties utility has 15 times as many customers as the emirate has citizens, but Londoners should not fear this bid: after decades of nationalisation they are used to drinking government-supplied water, and after six years of German ownership foreign bodies in their bath water are nothing new.

What would be a novelty is for the capital’s water to be run by someone who cares about customer service. Thames can bleat about its inheritance of Victorian pipelines, but the industry regulator thinks the company could have done more to plug leaks and there is no excuse for failing to compensate customers for missed appointments, disrupted supply or ignored complaints. The watchdog is now calculating the fine for such failures, having already penalised it on leakage. While privatisation has given us a choice of whose electricity, phones and gas we now buy, we are still stuck with one water provider: if customers cannot select any supplier other than Thames, then the regulator must be especially careful in selecting who buys the company. Qatar, which is in partnership with the Swiss bankers at UBS, will be in competition with Guy Hands’s private equity fund and a babble of other would-be water owners; but while RWE, the German sellers, will want to make this an auction based on price, the Ofwat regulators should ensure that the winning bid is assessed on promised customer service.

Thames previously traded under the witty slogan ‘Running London’s Water’. On its recent record it could have looked to the sewage half of its business and adopted the motto ‘Taking the piss out of the capital’.


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