News Column

Nils Pratley on Saturday Reading between the lines shows Carney is in a tricky spot

June 14, 2014

Nils Pratley



=Mark Carney is like one of these World Cup referees with a can of magic vanishing spray. Whenever the governor of the Bank of England draws a line on the pitch, the mark quickly disappears.

On arrival in the job just less than a year ago, Carney's forward guidance indicated that interest rates wouldn't go up until at least 2016. That idea was quickly abandoned as the economy took off and unemployment started to fall.

Last month, Carney was still playing down expectations of a rate rise this year by saying the economy had "only just begun to head back towards normal". Now the first rate hike "could happen sooner than markets currently expect". The revised betting in markets after Thursday's Mansion House speech is November.

There is nothing wrong with being flexible, of course. It would be odd if the governor and colleagues were not. But the rapid evolution of thinking indicates the tricky nature of the coming decisions for the Bank's rate-setting monetary policy committee. Inflation is low - just 1.8% on the latest reading - but there are obvious dangers in maintaining Bank rate at emergency levels when the economy is expanding at 4% or so and the housing market has taken off, thereby creating risks to stability if borrowers over-extend themselves.

House prices have risen by 10% over the past year, approaching early-2007 levels, and the excitement is no longer confined to London and the south-east. As Carney noted, "expectations that prices will continue to rise are now most marked outside London".

The governor's aim, roughly speaking, is to keep rises in interest rates "gradual and limited" and use specific measures to guard against excessive indebtedness. The latter are the so-called macroprudential tools, such as caps on loan-to-income ratios and demands to lenders to hold more capital against mortgages.

Nice plan, but do macroprudential tools actually work? Carney conceded they are "relatively novel" in the UK, even if they have proved effective in other countries. Not everybody is convinced by the evidence from elsewhere. Fidelity's Trevor Greetham argues that Canada has been using loan-to-value caps since the second world war and "the jury is still out as to their impact".

On the UK today, Greetham says: "I don't think macroprudential measures will slow the housing boom effectively, and they could actually raise financial risks if they delay a warranted rise in base rates."

Carney might counter that he's anticipated that threat. After all, he also said at the Mansion House that "macroprudential policy is not a substitute for monetary policy". Fair enough. But the interplay between interest rates and loan caps is going to be hard for policy-makers to gauge. Vanishing lines could be followed by blurred lines.

= General opinion seems to regard London's black-cab drivers as a bunch of Luddites unworthy of protection on account of their arrogance, lack of road manners and shunning of journeys they don't fancy.

They're not all like that by any means, but the caricature was reinforced when the cabbies blocked roads in central London on Wednesday to protest about Uber's smartphone app. They deserve their comeuppance, many argued.

Really? On the issue at the heart the protest - does the Uber app represent fair competition? - the taxi drivers surely have a strong case. The current licencing regime requires black-cab drivers to ride around for a couple of years on mopeds to acquire "the knowledge" of London's roads. In the age of sat-nav, that requirement is probably overdoing things. But those are the rules and, in return, taxis are supposed to enjoy several privileges, such as a regulated meter, which private hire firms do not enjoy. They also have obligations: drivers must use high-specification vehicles that cost pounds 35,000 and upwards and attract a heavy road tax.

The Uber app would appear to bypass the meter regulations altogether. A smartphone is used to calculate fares according to time and distance. That's a meter by any commonsense definition.

It's now up to the high court to judge the legality of Uber's app, which is the correct way to settle the dispute. But you can't blame the cabbies for insisting their rights are enforced, if that's how the court rules. Nobody, after all, is suggesting that their obligations should also be ripped up and that they be allowed to drive Toyota Priuses, or whatever, to compete with Uber on price.

High-quality, safe taxis offering regulated fares have been seen as a social good for decades. Transport for London, which approved the Uber app, seems dazzled by the notion that all disruptive technology benefits consumers. Usually it does. But sometimes it produces a dispiriting race to the bottom.

=Half the banking world styles itself a "challenger" bank these days. Ridiculously, Lloyds, the UK's biggest domestic banking group, even applies the term to its 100%-owned Halifax operation. If that's the benchmark, TSB, taking the first steps towards separation from Lloyds next week via flotation, definitely has rights on the label. Sure enough, TSB chief executive Paul Pester has been using it liberally.

To give TSB credit, it is full of ideas on how to be different. An interest rate of 5% on current accounts is market-leading. And, as mentioned here last week, the new pay arrangements at TSB are novel. Pester will be paid less than peers, and bonuses for all staff will be calculated as a percentage of salary with the aim of rewarding good customer service rather than flogging financial products.

But being different is not the same as being a forceful challenger. There is no neat definition of a challenger bank , but Sir John Vickers'sIndependent Commission on Banking had a stab in 2011. It recommended that the entity being split from Lloyds should have a share of the current account market of "at least 6%". TSB will start with 4.2%.

Good luck to TSB, but, purely from a competition perspective, its rebirth as an independent bank is pretty timid.



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Source: Guardian (UK)


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