What a surprise, the great British consumer did not retreat into a bunker after the vote for Brexit in June. He and she kept on eating, drinking and buying houses as if nothing of great significance had happened. “For households, the signs of an economic slowdown are notable by their absence,” admitted governor Mark Carney, struggling to explain why the Bank of England’s forecast in August that short-term growth in the UK economy would come to a near standstill was wrong by an embarrassing margin.
Sympathy for the forecasters should be limited. It is true that referendums, especially ones that lead to the defenestration of a prime minister, don’t happen often. But, come on, it was hardly fanciful to think consumers might disregard, for a while, the dangers of an actual exit from the European Union if the event was pencilled in to happen only in 2019.
Real incomes are still rising (for now) and experience suggests UK consumers tend to stay on the dancefloor until the music stops. Such behaviour is possibly imprudent in the face of a 20% fall in the exchange rate but most Britons, unlike Bank officials, do not spend their days modelling inflationary pass-through effects.
Indeed, for homeowners with variable-rate mortgages, the first direct financial impact of the referendum was a small reduction in monthly payments after the quarter-point cut in Bank rate in August. Carney and co can take some small credit for a successful intervention but their short-term forecasting misjudgment remains severe. Wisely, the governor did not claim to have saved the nation from the gloom he predicted. The positives “are neither solely due, nor totally unrelated to” the Bank’s actions, was as far as he dared fudge it.
If Threadneedle Street couldn’t tell what lay around the next corner, should we trust its projections for 2017 and 2018? Actually, yes, we should. Those inflation models aren’t perfect but it’s not hard to predict what will happen when the pound is down by a fifth. Prices will rise. The Bank foresees a peak for inflation of 2.75% in mid-2018, which is lower than some in the City expect. But it will be quite enough to squeeze living standards. On that score, believe the Bank.
Pension Regulator’s patience finally snaps
So much for “the light in the tunnel” that Sir Philip Green claimed to spot as long ago as June in his negotiations with the Pensions Regulator over the deficit in the BHS fund. He was still seeing rays of optimism in his interview with ITV a few weeks ago but the regulator told him to check his vision. “We are yet to receive a comprehensive and credible written proposal and have made clear what we require,” it said, hinting that its patience was wearing thin.
Now it has snapped. The regulator has launched formal legal proceedings against Green (plus a company controlled by his wife, and also against Dominic Chappell, the former bankrupt whose outfit bought BHS for £1).
Green suggests he can’t understand the fuss. He says he’s put forward “a credible and substantial proposal, with evidence and bank confirmation of cash availability”. The Topshop tycoon seems to have misunderstood how the process works. It is not for him to decide what counts as credible and substantial – that’s the regulator’s role.
As far as we can tell, the dispute involves fundamental questions, like the size of the initial lump sum to cover the deficit. If so, the regulator is right to issue warning notices. Green first started talking about his plan to “sort” the deficit back in 2014 when he (or, rather, his Monaco-based wife) still owned BHS. The farce has run too long already. It’s now time to discover if the regulator’s powers of compulsion are as strong as they ought to be.
FCA picks up baton dropped by CMA
The Competition and Markets Authority’s proposals to enliven the banking sector were feeble, almost everybody agrees (apart from the report’s authors, of course). Now, even the Financial Conduct Authority seems to have sided with the doubters. The City regulator will study whether it should impose a cap on overdraft fees, an idea the CMA rejected in its summer report.
The two bodies perform different roles, so all sides can pretend politely that there is no fundamental disagreement. But, as the watchful Treasury select committee chair Andrew Tyrie says, it looks as if the FCA is picking up a baton dropped by the CMA. Indeed, the FCA’s inquiry could quickly become a wider review of where else the CMA failed. That would be very welcome.
