The purists have loudly declared that the Bank of England’s U-turn on three-month loans was undesirable. Was it also unnecessary?
For all the interest in its auction of three-month money on Wednesday, the Bank might as well have been trying to sell Old Masters to connoisseurs of the Cubists. There were no bids for the £10bn on offer, despite the shock decision last week to accept lower-quality collateral – a reversal that put Mervyn King, the governor, in the dock for abandoning his principles.
But the martyrdom of St Mervyn was not in vain. With hindsight, the Bank should have followed the lead of the European Central Bank and offered such a facility during August, when Northern Rock, for one, might have taken advantage of it. Failing to flex last week would have meant wilfully ignoring the psycho-political need for a gesture to ease panic. Without the concession, the three-month London interbank offered rate (Libor) might not have fallen back. But the fact that cheaper money is, in theory, available in the market makes the Bank’s penalty-rate loans less attractive. In an odd way, then, the central bank’s offer of the more flexible facility created some of the conditions for the facility not to be used.
Some, but not all. The Bank is calling the auction a “safety valve”. That is apt: it is a product feature that makes the owner more comfortable about using the machine, even if she never expects the valve to blow. But to assume that the pressure has now dropped and that the system has reverted to normal would be dangerous and premature. Big banks can source funds elsewhere – including from the ECB, if they have continental European subsidiaries – but the market rate may not be available to smaller British mortgage lenders. Yet for these banks, the stigma of approaching the Bank of England for a loan is likely to remain a powerful deterrent, unless funding pressure mounts again to crisis levels.
Rock’s ripples spread
To the old staples of unseasonally warm (or cold, or wet) weather or the distraction of a big sporting event, add a run on the local bank as an excuse for customers’ reluctance to buy your product. Brave Barratt has become the first non-financial company to refer to the impact of the Northern Rock crisis in a results announcement.
It didn’t name the hapless mortgage lender and it wasn’t an excuse as such – the calamity occurred after the housebuilder’s financial year to June 30. But Mark Clare, chief executive, identified an “abrupt reversal” in sales last week, which interrupted the normal September increase in activity. Plenty of potential buyers were prepared to visit Barratt’s offices, but when it came to signing on the dotted line – either to pay a reservation fee, or to complete a deal – they held off. Whether the effect lasted more than a week is anyone’s guess, but it was enough to slow the sales reservation momentum that Barratt cited in its last trading update as recently as July 11. Volumes and price growth are likely to suffer. The “fundamentals” of the UK housing market (simply put: more housebuyers than houses) are firm. But higher interest rates, tighter lending criteria and fewer available mortgages (the Barratt, rather than the Bank of England, view of credit conditions) cannot be a good combination for a builder.
This coincidence should also worry sellers of big-ticket consumer items, from kitchens (Home Retail Group, Kingfisher) to plasma televisions (DSG, Kesa Electricals). All have expressed caution about the outlook, simply on the basis of the upward trend in interest rates.
If the sight of ordinary citizens queuing round the block to withdraw their savings has itself had a chilling effect on one or two weeks of consumer activity, this won’t be the last we hear of the Northern Rock Effect.
Low ball and hard ball
Not many predators bid below their prey’s market price. If Hugh Osmond of Pearl Assurance decides on this tactic for an assault on Resolution Life, he will have to hope that Standard Life abandons its flirtation with Resolution, leaving the latter’s shareholders a choice of the lower immediate value of shares in a merger with Friends Provident or Pearl’s cash.
In 2005, the Macquarie-led consortium bid for the London Stock Exchange at an impudent discount to the then market price, let alone today’s stratospheric levels. But that was a unique auction for a scarce asset. In a market this volatile, cash is enticing enough to interest some investors. As for Mr Osmond antagonising his target, there is already little love lost between him and Resolution’s Clive Cowdery. For the former, a bid at the lowest price Pearl is allowed to pay may be the most direct route to the negotiating table.
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