13 AUGUST 1988, Page 19


The comical game of Grandmother and the seven footsteps


We can see the game that the Chancel- lor has been playing. It is Grandmother's Footsteps. Interest rates take a little step up whenever the market is not looking. This week's step came off comically. The equity market-makers, having stocked up their books and suffused the Sunday pap- ers with their expressions of confidence, were enjoying the higher prices on Monday morning, when up popped 11 per cent base rates and their day was quite spoilt. It is, though, the foreign exchange markets which matter for this game. The object has been to push interest rates up without launching the pound into the wide blue yonder, and so the steps have been taken when the market was looking the other way, at the dollar. 'Short-term interest rates' (so the Chancellor was saying last month) 'are the market route to the defeat of inflation. At one time it was feared that governments would not be prepared to adjust interest rates, sufficiently often, sufficiently promptly, or sufficiently far.' No fear now, he said, and I suppose that after seven steps there isn't. I also suppose that by now we have quite a stiff combina- tion of fiscal and monetary policies — real interest rates of six per cent or so, no weakening in the exchange rate, and the prospect of a revenue surplus to break every record. Indicators to watch from now on include MO, the narrow measure of money (if only because the Chancellor watches it and it is demonstrably off target) and house prices, where the Halifax Build- ing Society and Lloyds Bank's economists are both calling the top of the market. The indicators will respond more quickly than the figures for our international trade and Payments, and on these we must make do with the twin consolations now on offer. One is from Phillips & Drew, who say that the official figures have understated our performance for years — by, they say, £2 billion last year. The other is from the Chancellor, who has taken to arguing that a deficit is all right so long as the private sector, not the Government, is running it. A current account deficit is not at all like a company running at a loss. A better analogy is with a profitable company rais- ing funds overseas.' I would have thought the test is what happens to those funds. If they are for productive investment, fine. If they are to pay for luxurious buildings or to provide creature comforts, not so fine.