Liz Truss is into the last three and showing momentum, which is the point at which we should fret over the fate of the pound. Investors may be prepared to overlook loose talk about £30bn-worth of unfunded tax cuts – this a campaign, after all – but questioning the independence of the Bank of England is several grades more serious. That is the territory into which the foreign secretary veered at the weekend.
Or, at least, she seemed to do so. As well as supply-side reforms and getting public spending under control, Truss told the Sunday Telegraph she “would also have a very clear direction of travel on monetary policy”. The government should “look again” at the Bank’s mandate “to make sure it is tough enough on inflation”, she said.
One possible interpretation of those vague remarks says Truss is proposing greater autonomy for the Bank, not less, so that it can be harder on inflation in the manner of the pre-euro Bundesbank in Germany. But that is not the obvious reading.
A new “direction of travel” would seem to imply that the Treasury should have a say in interest-rate decisions, or should be able to tie the hands of policymakers by, say, ordering them to concentrate on measures such as money supply.
Such a reform would rip up the system that has been in place since 1997, when Gordon Brown gave the central bank independence to manage monetary policy to meet an inflation target of 2%. Any change would be a major political and economic event.
Given what is potentially at stake, it was good that Michael Saunders, an external member of the Bank’s monetary policy committee (MPC), took the bait and gave a strong defence of the current setup on Monday.
“The government very clearly does not set the direction of travel for monetary policy, that is set by the MPC,” he said. “That is fundamental to the UK framework and the credibility of the framework, and it has served the UK well for the past 25 years. The foundations of the UK monetary policy framework, I think, are really important and best left untouched.”
Absolutely right: credibility in financial markets depends on the Bank being seen to be beyond political meddling. Mark Carney, when governor, got it in the neck from politicians occasionally over quantitative easing, but nobody close to power ever seriously proposed changing the Bank’s authority over monetary policy.
Truss would be breaking new ground in that regard. Yes, by all means grumble about inflation being 9.1% and how policymakers were slow to react. But, if your big idea is to remodel the entire monetary framework, you’re obliged to do more than make a few throwaway remarks. If not, don’t be surprised if markets take fright.
By way of a hint, Citigroup’s chief UK economist, Ben Nabarro, assessed the Tory candidates’ pitches and concluded this week that the greatest risk to the UK economic outlook was Truss’s “unseemly combination of pro-cyclical tax cuts and institutional disruption”.
There will be more in that vein if Truss makes the next round, looks like winning in September and leaves her comments on the Bank’s role hanging in the air. Sterling investors, one can safely predict, would not like it one bit. Truss should clarify what she meant, sharpish.
A shocker that Made.com already running low on cash
Supply chain chaos, hikes in freight rates and now a consumer recession. Yes, Made.com, the online-only furniture retailer that sources its goods from the far east, has had life tough since it arrived on the London stock market last year, sporting a £775m valuation.
Even so, it’s a shocker to see that the company is already running low on cash, which is what “considering options to strengthen the balance sheet” means. The business raised £100m at float, had net cash of £107m at the end of December, but now reckons its balance will be down to £5m-£30m at year end after another loss-making 12 months.
Given that it predicted £40m-£65m only two months ago, the deterioration has been as rapid as the collapse in the share price – from 200p at float to 21p – suggests.
One subplot to watch now is whether Made’s venture capital backers, who still own about a third of the shares, dig deep to support a fundraising. Normally, private equity regards a listing as a way to sell down its residual holdings over time. On this occasion, the money may have to flow in the other direction.
