It’s a question as old as yesterday afternoon. Who is the real hardman of central banking? (Following the US Fed’s aggressive rate cuts this year we can discount Ben Bernanke from this contest).
Both the Bank of England and the European Central Bank (ECB) have a mandate to fight inflation. And both kept rates on hold yesterday, in response to inflationary pressures.
In recent months it’s been Trichet who has boasted the more macho credentials. The ECB has kept rates on hold since last June, when they hiked them from 3.75% to 4%. Indeed, that increase was the last in a line of rate hikes dating back to 2005. The ECB hasn’t cut its main rate since June 2003.
King, by contrast, cut the Bank of England’s rate as recently as last month. He also cut it in February... and last December. But it’s worth pointing out that this was preceded by a hawkish period which saw rates climb steadily up to 5.75%. To use the language of the hardman, King is also a bit ‘tasty’...
The Bank of England’s rate is also a full percentage point above that of the ECB. This might suggest King’s the tougher customer — but a higher nominal rate does not, on its own, make for a monetary hardman.
To settle matters, let’s take a look at what each of the contenders said following their respective rate decisions yesterday. Trichet’s statement acknowledged that economic sentiment had ‘continued to soften’. But it was still fairly hawkish in tone. When it comes to inflation, JCT appears to mean business.
King, it seems, was also in business-meaning mode yesterday. Despite a glut of ‘bad data’ this week that could have pushed him into a cut, Big Merv stood his ground. The Bank stuck to its policy of preferring to avoid back-to-back cuts.
But since the Monetary Policy Committee (MPC) generally doesn’t issue a statement unless it’s changed the rate, King had no opportunity to enhance his big man credentials.
On balance I’m going to award the title of Hardest Central Banker to the boy from Frankfurt. I’d say Trichet wins on points over King — but there’s a big caveat.
Unlike the MPC, the ECB’s Governing Council does not publish the minutes of its rate-decision meetings. This makes the ECB less transparent than the Bank of England. But it also makes it more independent.
ECB rate decisions, therefore, cannot be subjected to the same scrutiny as those of the Bank of England. That, together with the fact that the ECB sets rates for the whole of the eurozone (and so is not accountable to the leader of one national government), gives Trichet a freer hand.
I imagine King must envy him. Last month the MPC cut the base rate. It was probably going to do so anyway, but Gordon Brown’s comments in the run-up to the decision that inflationary worries had eased left a bad impression.
If King and Trichet squared up in a fight, JCT would win. But Big Merv would be fighting with one hand tied behind his back.
Cigarettes and Alcohol
People like to be bad. They spend money on bad things — like cigarettes and alcohol. Today, our research director Theo Casey takes a look at how investors can turn a profit from other people’s bad habits.
"Think of these as a play on the weakness of our own economy and the strength of the emerging markets," he says.
This type of investing isn’t for everyone — but if you’ve the stomach for it, check out Theo’s analysis.
Africa: the new rice bowl of China
Yesterday I told you that Manraaj Singh doesn’t like to invest where most investors invest. Today he’s showing that contrarian streak again.
Most investors are scared to put their money in Africa. The continent is war-torn, impoverished and ravaged by corruption.
But our emerging markets supremo is a breed apart. He doesn’t let those things daunt him... not when there’s a major profit opportunity on the table.
Today he tells us why China’s food crisis gives yet another boost to the African investment story. Because Africa is about to become a major producer of China’s food...
"This policy marks one of the great turning points in global history — mark my words on that," says Manraaj.
This isn’t front page news — but then the best investment opportunities never are.
And, as Manraaj explains, most investors are literally underestimating Africa..."
Too little too late for Britain’s energy strategy
Our commodities man Garry reckons EDF is the hot favourite to win the British Energy bidding war.
"EDF are a shoe-in... if they don’t win I’ll eat my beret," he writes in today’s issue of Smart Commodities.
But it’s going to take at least 12 years for any new nuclear plants to come on stream. In the meantime, we have a huge black hole in our energy strategy.
"The future’s dim!" quipped Garry at this morning’s meeting. "Unfortunately there’s only one place we can turn to our for our energy over the next 12 years..."
Until tomorrow
Ben Traynor
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