Get a grip Darling – Northern Rock and interest rates need attention

The Chancellor lurches from muddle to mess on his various battle fronts.

Today we read that a rival bid is being warmed up for Northern Rock. I read in some papers that Virgin was given preferred status and allowed to enjoy great publicity for its bid in the hope that its name associated with Northern Rock would reassure depositors and stop the withdrawal of so much more money. Because the withdrawals continue, it appears the government is keen to give airtime to other bids, or will not stand in the way of their promotion.

When will this government realise that instead of playing media games with important issues like this, their job should be to define the taxpayers interest and get on with managing the banking relationship between the company and the public sector, influencing the sale process in the taxpayers interest? The deposits will only be stabilised when there is an agreed deal the public believes in. Today’s revelation of ??1,000,000,000 a year now being spent on spin by central and local government just underlines how far government time and priorities are distorted by trying to influence the media instead of trying to manage efficiently.

It appears that they still think spin is the answer to the Rock’s problems, when some good old fashioned banking discipline to determine how much taxpayers money is available on what terms should be central to an orderly auction and a successful outcome.

We also read of the growing concern in the City about the very tight conditions in money markets. Readers of this blog will remember predictions of monetary tightness over the year end, and my call for lower interest rates now. I am glad to see the heavyweight members of the Shadow MPC out and about in support of this cause – Tim Congdon and Patrick Minford are both calling for cuts in MPC rates. I will be happier when the MPC itself gets the point.

Market interest rates are almost 1% or 100 basis points above MPC rates. The MPC, if it still thinks 5.75% is the right rate, needs to cut its own indicative rate to try to get market rates back down to around 5.75%. They should ignore the short term price pressures on energy and food, and realise that the credit crunch means inflation coming down again next year.

I also suspect all the worries about further large rises in oil and other industrial commodities are overdone. Oil is now falling from near the $100 a barrel level. At an oil seminar yesterday I learned that barring a major disaster in one of the big oil producing areas experts see no great problem with supply and demand next year. Saudi Arabia can decide how tight the market should be as the swing producer, and I suspect Saudi will be reluctant to tighten too much more given the fragility of the international economy and the views of the USA.

The message from previous “oil” crises was that the bigger damage to world growth was perpetrated by central banks raising interest rates to try to offset the energy price increases, leading to less lending and a slowdown or reduction in activity. The Fed looks as if it wishes to avoid this this time. How about the Bank of England?

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3 Comments

  1. Tony Makara
    Posted December 4, 2007 at 7:21 pm | Permalink

    Interesting analysis. I'm looking forward to seeing the Redwood response to the Monetary Policy Committee tomorrow.

  2. Steven_L
    Posted December 5, 2007 at 1:58 am | Permalink

    "At an oil seminar yesterday I learned that barring a major disaster in one of the big oil producing areas experts see no great problem with supply and demand next year." (JR)

    I've never been to an oil seminar. However back in summer 2006 I observed that oil prices seemed to react to geopolitical instability that did not directly affect major oil producers. The $78 peak during the Hezbollah/Israel conflict was said to be cause by speculation due to the aforemetioned conflict and North Korea launching rockets into the Sea of Japan.

    I appreciate the inflationary pressures any be different now with the credit crunch and tighter monetary policy, but some commentators believe there will eventually come a point (if opil continues to become more expensive) where rising oil prices increase the demand for money to an extent which causes stagflation. I can see the logic in this too.

    Personally I believe oil prices will back off again now for the immediate future and a January rate cut is on the cards. Howver in terms of oil prices I think that the nature of the way in which commodities are traded means that geopolitical events that are not directly related to major oil producers can cause an increase in demand for futures contracts.

    I find it amusing that some Western commentators blame Saudi production for oil prices whilst the Saudis blame Western speculation, when it is quite cleary a combination of both factors.

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    Posted December 13, 2007 at 7:56 am | Permalink

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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