BANK RATE FUMBLES
By NICHOLAS DAVENPORT LAST week, while the whole City stood still with bated breath, the Old Lady of Threadneedle Street made this solemn announce- ment : 'The Bank of England have today decided, with the approval of the Chancellor of the Exchequer, that there shall be no alteration in the rate of discount today.' The tempest of the Rad- cliffe Report had subsided, the thunder of the parliamentary
debates on it had rolled away and the still small voice of the Old Lady was heard once again making the Bank rate decision—but with a little squeak from the Chancellor added to please his Learned Lordship and the Opposition. To make the joke more bitter-sweet it was almost certainly
the wrong decision for the Chancellor to approve.
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This may seem a surprising statement to make for one who has always deplored the use of dear Money as a cure-all for the fevers of the economy. But I am no escapist. The Western democracies are in the hands of stern, fanatical money mana- gers and they have all—with the exception of the British—been obsessed with making money dearer in pursuit of their disinflation policies. Witness the higher rates in New York, Frankfurt, Amsterdam and Paris. Now that our exchange controls have been dismantled—except for the domestic capi- talist—and sterling has become convertible for the foreigner it is absurd to pretend that we can live in a monetary vacuum and maintain rates at home which are completely out of line with rates abroad.
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Short-term funds in sterling have already been switched to other centres—New York mainly —to take advantage of the gain in interest. Banks have borrowed cheaply in London to lend dearly in New York. German banks have withdrawn funds in sterling for more profitable use at home --where bank reserve requirements have recently been tightened up. The result has been a loss in the gold reserves of £18 million in November and a temporary fall in sterling—for the first time since the great recovery—to below the level of parity. This deterioration will go on as long as London remains a centre in the monetary world where cheap and easier credit can be obtained. Although our bill rate rose last week to just over 3.1- per cent., it is still more than 1 per cent. below the American bill rate (now 4.64 per cent.), Sooner or later, if this wide margin continues or worsens, Bank rate Will be forced up to 5 per cent. to protect our Position. We may be glad to see the 'hot' money 80, but we cannot afford to lose much gold from our still inadequate reserves. It is surely nonsense to protect America's stock of gold (still much too large) and let our inadequate 53,000 million stock shrink at all.
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I hasten to add that our domestic economy calls for no dearer money..There is nothing seriously Wrong with our competitive position in world trade, We are enjoying a strong recovery from a Period of restraint and semi-stagnation and this
lirirecovery, having started in the consumer and con- sumer durable trades, is now beginning to reach Out into the capital goods. There are signs at last that investment in private industry is beginning to revive, which is some assurance that our com- petitiveness abroad will be maintained. (The Financial Times reminded us recently that so competitive are our prices that since the St. Lawrence Seaway was opened British steel has been landed in Chicago at prices below those of steel produced in Chicago itself.) There is, there- fore, no reason to be worried about maintaining the reduced, but not too bad, surplus on our current international account. Imports have risen but exports are not far behind—for the ten 'months of this year they were 4 per cent. up on 1958—and it looks as if the current account sur- plus for the year will not fall below £250 million. It is just because sterling is now a fundamentally strong currency and the dollar a weak currency needing protection—because of its adverse balance of payments—that all this trouble has arisen. An advance in Bank rate, if it comes, would simply be a temporary measure and in all proba- bility would not need to be held for many months —certainly not long enough for dearer borrow- ing to begin to affect domestic investment. Indeed, if the Bank of England conducted its gilt-edged market operations in the way intended by the Radcliffe Committee it would see to it that the long-term rate of interest was not affected by a temporary advance in Bank rate. Why, then, have the authorities not risen to this technically simple occasion?
I can only suggest that they are suffering from a sort of guilt complex arising out of their shock- ing and contemptuous treatment of the Radcliffe Committee. There can be no doubt that the Chan- cellor. did not enjoy the tart indictment of Tory monetary policy which was developed in the Rad- cliffe Report and that the Governor of the Bank was not at all pleased by the Committee's animadversions on his conduct of funding opera- tions and the use of Bank rate. Certainly they would not be sorry to see the Radcliffe Report killed and buried. At the same time they would be sensitive to the accusation that they were taking any anti-Radcliffe step so soon after the burial service in the House of Commons. But is this sensitiveness putting sterling to risk? Or are the authorities so upset by the Radcliffe debate that they have lost their sureness of touch?
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One thing is certain—that this fumbling over Bank rate is confusing the market. A recom- mendation of the Radcliffe Committee against which no dissenting voice could reasonably be raised, was that the authorities should always make their intentions clear in the market. We believe, they said, that there is everything to be gained by open discussion and that fuller under- standing, both of what the authorities are doing and of their methods, will in general strengthen the Treasury's hand. Obviously, if the Bank thinks that Bank rate should be raised temporarily to protect sterling, and if the Treasury is anxious not to raise the long-term rate of interest and jeopard- ise our precious recovery, then let their views be known in the market place. The gilt-edged market would then play its part in support of the official line. Short-term bonds would fall on a 5 per cent. rate but the long-term rate of interest would not be affected at all. For the authorities to fall back on mystery or silence at this time is surely a retrograde step. Even if Radcliffe is buried, the Macmillan report is still alive.
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