Anthony Hilton

By ANTHONY HILTON FOR MAILONLINE
Updated:

 

When Peter Mandelson spoke out in favour of euro membership a few weeks ago, he said in support of his argument that the substantial appreciation of sterling and its current perceived overvaluation were destabilising.

Hence the sharp intake of breath from Chancellor Gordon Brown, whose self-appointed task has been to deliver stability so that commercial enterprises will have the confidence to invest. Brown rarely misses a chance to talk about the stability that has been achieved; he does not need a colleague as influential as Mandelson reminding us of the instabilities caused by Government policy.

The Bank of England's monetary policy committee, which is beginning its monthly meeting, was created as part of that exercise in securing stability. The perception thus far is that it has done its job well. Inflation is well under the target of 2.5%. Interestingly, no one sees missing the target on the downside as anything like a serious sign of failure, as they most certainly would if inflation had come in over target by a similar amount.

But we need to be clear that the MPC did get it wrong, if only to guard against it getting it wrong in the future. If one looks at the inflation report for May 1998 when the Bank was setting policy to influence events of today - here being roughly a two-year lead time before its measures have their full effect - it can be seen that much of what the Bank predicted for the economy has not happened. Specifically, it was dead wrong on sterling and oil prices. This is not a criticism, but a reminder that we should never take economic forecasts too seriously - or as seriously as the MPC itself sometimes seems to do. They are always hit and miss. It has been the MPC's luck that its mistakes on predicting the right level for sterling worked for it in bearing down on inflation. It means that interest rates have probably been too high for most of the past two years. But the real issue, now that sterling shows some signs of weakening again, is whether the Bank will feel obliged to compensate immediately for this weakness by pushing rates higher.

That is the sort of knee-jerk reaction central bankers are wont to have. However, it would be unfortunate if the MPC, having for two years ignored sterling's strength and pushed rates up regardless, should now pay overmuch attention to sterling's weakness and use that as an excuse also to push rates up. This is another month when there should be no change.

Clear change
One month on from the historic announcement of the merger of the London and Frankfurt stock exchanges to form iX, new LSE chairman Don Cruickshank swings into action shortly with a series of what are effectively roadshows to the holders around the country of the 298 shares in the Exchange.

His aim will be to calm some of the nerves that have been jangled before publication of the information memorandum in five or six weeks' time. The fears of the retail broking community have, as ever, been vociferously put by their spokeswoman Angela Knight of the Association of Private Client Investment Managers and Stockbrokers. That organisation has enough members to block the deal but there are signs some brokers are switching their attention to the potential rather than the problems. Cruickshank will encourage that thinking.

But there remains an area of concern for brokers over which Cruickshank has little direct influence, and that is the future of clearing and settlement. London's Crest and Frank-furt's Clearstream said a month ago that they would work towards a unified system. But if brokers and investors are to make the kinds of savings iX could deliver, they need to know within the next six weeks and not over the following six months what is meant by unified.

Many think they ought to merge as Europe currently has almost twice as many settlement and clearing systems as it has exchanges, but there is no sign of this happening yet. If nothing tangible happens, it could break the deal. That makes this an issue where the Bank of England ought to use its influence on Crest, if not on Clearstream, to secure the outcome it feels is in the best interests of the City.

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