Comment: Sir Mervyn King backing the only economic game in town

By MARTIN FLANAGAN
Published on 06/07/2012 00:00

TO NOBODY’S surprise, given the raft of depressing economic data of late, the Bank of England’s monetary policy committee (MPC) has decided to pump more money into the British economy.

The central bank is to buy a further £50 billion of government bonds over the coming months to try and stimulate demand in an economy that is mired in its first double-dip recession since the three-day-week 1970s.

It takes the Bank’s so-called quantitative easing (QE) programme, which began at the heart of the 2008-9 recession, to a heady £375bn.

Apart from the occasional City bear griping about the BoE money taps creating an inflationary risk, the overwhelming reaction of market professionals is that the UK economy needs any help it can get.

Meanwhile, many pensioners and people living on their capital will welcome QE as a better alternative than governor Sir Mervyn King and his colleagues on the MPC cutting base rates again from historic lows of 0.5 per cent.

There is a direct line between the excesses of the bankers, the double-dip recession and the miserly rates being paid on deposits since the five-year transformation of the nation’s finances began in the wake of those queues that snaked round the block at Northern Rock’s branches. Pensioners’ savings have been a major casualty of the change as the weakness of the wider economy has exerted greater pull on regulators’ and rate-setters’ attentions.

The MPC has always suggested it is more of an art than a science in judging how beneficial QE is to British GDP. But £375bn is quite a lifeline for lending, so the question should perhaps not be how much good has it done, but rather how bad might things be for the economy if the BoE had not pumped so much money into our faltering recovery?

Some have calculated the amount of money the Bank has electronically injected into the economy is equivalent to one quarter of the UK’s annual gross domestic product or about £14,000 per household.

We should be grateful, but unsurprised.

At his recent appearance before the Treasury select committee, King said he believed we were not even halfway through our economic and financial crisis.

Britain also can’t hope presently to export its way out of trouble given the lack of demand in our main trading partner, the eurozone.

QE, therefore, has increasingly assumed the mantle of the only game in town as far as any UK economic optimism is concerned.

Ratings agencies not slow to twist the knife

IT NEVER rains, but it pours. As if Barclays was not battered enough by boardroom turmoil and regulatory condemnation, the credit ratings agencies have now wasted no time in twisting the knife. Both Moody’s and Standard & Poor’s have lowered their outlook for the bank from stable to negative in the light of what they say is strategic uncertainty facing the bank.

You can’t really blame them. Against the backdrop of Libor interest rate-fixing, Barclays chief executive Bob Diamond and chief operating officer Jerry del Missier have exited abruptly, while the group arguably has a lame duck chairman in Marcus Agius who is leading the search for a new chief executive after earlier saying he was stepping down himself. The ratings agencies are concerned about assessing Barclays’ financial strength when it is uncertain what strategy any new chief executive, particularly recruited from outside, would embark on.

For example, how important will the tarnished investment banking operation be in future, will it be downsized? This is important because the division’s often strong performance is a key metric in deciding what credit ratings to attach to Barclays.

Managerially and strategically, Barclays looks a bank in flux and that is never good for the quality of credit ratings. Is it only five years ago that the group was lauded for pulling out of the suicidal banking race for ABN Amro and then avoiding a British taxpayer bail-out by bringing in sovereign Middle East and Asian funds instead?

In recent years, financial investors have divided the banking sector into Barclays and HSBC, good: Lloyds Banking Group and Royal Bank of Scotland, bad. The waters have muddied.