the times | Wednesday December 2 2020 1GM 41

CommentBusiness

A surge in inflation will test the

Bank of England’s independence

A

ntónio Horta-Osório, the

outgoing boss of Lloyds,

likes to dive with sharks

in his spare time and can

put professional tennis

players through their paces at

Queen’s Club, where he is a

member. He might be hoping to get

a game with Roger Federer when he

moves to Switzerland to be

chairman of Credit Suisse.

The Portuguese banker will be

working with Thomas Gottstein, a

Credit Suisse veteran regarded as a

safe pair of hands who became chief

executive after the drama of Tidjane

Thiam’s departure in February. Mr

Gottstein’s favourite hobby is golf,

which he plays nearly off scratch.

The difference in the bankers’

preferred sport may reflect a deeper

gulf between what Mr Horta-Osório

— well known for his grasp of detail

and relish for calling the shots —

thinks the chairman’s role involves

compared with Mr Gottstein.

Mr Horta-Osório, 56, is not the

first forceful chief executive to move

upstairs at an age when they could

comfortably take on another

executive role. The clear

comparison is with Mark Tucker,

another strong character who has

worked in banking and insurance —

running Prudential and Asia’s AIA

— before turning to the role of

chairman of HSBC aged 59.

Mr Tucker has had mixed success

in his three years at the bank.

Having brutally fired John Flint, the

chief executive, he took ages to

confirm Noel Quinn, the interim

replacement, as his permanent

choice. Allowing Peter Wong, the

bank’s boss in Asia, to make an early

pledge to support China over its

national security law intensified

problems for the bank in Britain and

the United States. There is a feeling

that HSBC faces multiple questions

about its shape and direction.

The task of overhauling HSBC’s

performance is mind-bogglingly

difficult when economic trends and

the global pandemic are also taken

into account. But one of Mr Tucker’s

shortcomings, according to people

who know him, is that his

determination to get the best out of

his team tips over into demands that

cannot be met and badly damage

executives’ confidence.

Mr Horta-Osório will not face

such a complex situation at Credit

Suisse, but there are still problems

to tackle, including the regulatory

investigation into its internal spying

scandal. It is also in the middle of an

overhaul of its internal culture, an

issue that Mr Horta-Osório

addressed at Lloyds with a focus on

diversity of talent and mental

health. He could even bring in his

favoured three-year plans to help to

focus the minds of executives,

including on trying to boost Credit

Suisse’s rating to the same level as

that of UBS, its arch-rival.

In taking on the chairmanship of

an international bank, Mr Horta-

Osório may hope to move into a

bigger role on the world stage,

similar to Axel Weber, UBS’s

heavyweight chairman. He also is

likely to enjoy schmoozing

politicians and having greater

freedom to attend glamorous get-

togethers, such as Davos.

It seems unlikely, though, that he

will settle in for the 12 years that Urs

Rohner, his predecessor, will have

under his belt when he leaves in

April. Having driven through

restructuring to put Lloyds on a path

to recovery, Mr Horta-Osório was

still dealing with the legacy of

payment protection insurance mis-

selling and the HBOS Reading

fraud, making it impossible to focus

on long-held ambitions to turn

Lloyds into one of Europe’s most

powerful banks.

There was a time when he looked

a candidate to replace Ana Botín,

executive chairwoman at Santander,

when she steps down. That scenario

was spoilt slightly by the fact that he

was once a star inside the Botín-run

banking dynasty, having led its

Portuguese, Brazilian and British

divisions before — in their eyes —

treacherously jumping to Lloyds.

Time can be a healer, though, and

the climate is nicer for diving in

Spain than it is in Switzerland.

David Smith

Katherine Griffiths

For the Bank of

England, like the

rest of us, this has

been a year it did

not expect. Some

things have remained constant. In

January it was worried about the

negative economic impact of leaving

the European Union and last month it

warned that, even on its assumption

of a deal, cross-border trade with

Europe would suffer in the first few

months of 2021. At the start of the

year, two members of its nine-

member monetary policy committee

were worried enough about that and

a soggy global economy to vote for a

cut in Bank Rate, which was then a

heady (I jest) 0.75 per cent.

Nobody knew about the Covid-19

meteor that was about to hit the

economy and which, for the Bank,

resulted in a March Bank Rate cut to

a record low of 0.1 per cent, a decision

to put negative interest rates into its

toolkit (where they remain, so far

unused) and a massive amount of

additional quantitative easing.

Quantitative easing, whereby the

Bank electronically creates money to

purchase assets, overwhelmingly UK

government bonds, or gilts, to

stimulate the economy, has been on

steroids. Not long ago, the question

for central bankers was how they

could unwind a policy that was

mainly an overhang from the

financial crisis. Instead they have

found themselves doing much more

this year. In January, the cumulative

total for quantitative easing, first

embarked upon in March 2009, was

£445 billion. Since then, the total

announced has jumped to

£895 billion. More — £450 billion —

has been announced in the past 11

months than in the previous 11

years.

This has been highly

convenient for the

government. Its borrowing

this fiscal year is officially

estimated by the Office

for Budget Responsibility

to be £394 billion. What

could be handier than to

have the Bank buying up

this debt and, because

any interest it receives is

transferred to the

Treasury, at zero cost?

For critics, the Bank has crossed the

line into “monetary financing”,

whereby the central bank prints

money to buy government debt, thus

compromising if not destroying its

independence. For others, wrongly in

my view, it means the debt is not debt

at all, if it is owned by one arm of

government, which the Bank is,

having been nationalised in 1946.

This was the challenge taken up by

Andy Haldane, the Bank’s chief

economist, in a speech to University

College of London Economists’

Society at the weekend. The title of

his speech consciously echoed the

famous Monty Python skit on the

Romans. It was: “What has central

bank independence ever done for us?”

I learnt quite a few things. Central

banks are, in historical terms, quite a

recent phenomenon. At the end of the

19th century there were only eighteen

and America didn’t have one. By the

end of the 20th century there were

roughly 200. A central bank became

essential for most countries.

The Bank of England, established

in 1694, has been around for a very

long time and it took more than 310

years before Bank Rate went below

2 per cent, which happened just over

a decade ago.

The accolade for the oldest central

bank goes to the Sveriges Riksbank,

established in 1668. At the moment it

has an official interest rate of 0 per

cent, slightly below the Bank’s 0.1 per

cent, and is known for

funding what is usually

known as the Nobel prize

in economics. The Bank

of Sweden prize was

established in 1968, to

mark its 300th

anniversary.

Mr Haldane also

pointed out that

there are degrees of

independence. It is

not, in other words,

black and white. “In

no country in the

world is it absolute,”

he said. Although

the overwhelming

majority of central

banks are regarded

as independent, it

varies. On one

measure, legal or

de jure

independence,

based on research

by Carolina Ana

Garriga of the University of Essex, the

European Central Bank is the most

independent of big central banks,

legally prohibited from monetary

financing, followed by the Swiss

National Bank and the Bank of

England. America’s Federal Reserve

ranks lower, as does the Bank of

Japan and, despite its longevity, the

Bank of Sweden. The Reserve Bank of

New Zealand, which pioneered

inflation targets and gave us the idea,

also ranks quite low for legal

independence.

The Bank is not alone in having

greatly expanded QE this year. The

global quantitative easing total is now

$17 trillion and set to rise further.

When the QE announced last month

is completed, the Bank’s holdings of

gilts will be equivalent to nearly

50 per cent of UK gross domestic

product or the stock of government

debt.

Mr Haldane can say, hand-on-

heart, that this year’s decisions to

greatly expand quantitative easing

were based on monetary policy

considerations and not to give the

government an easy ride, as I am sure

would other MPC members. But he

admits that the Bank faces a dilemma

and, as its QE has expanded, “the

horns of this dilemma grow sharper”.

To support the economy, the Bank

wants to keep short-term interest

rates low, which it does with a 0.1 per

cent Bank Rate, but also medium and

long rates low, which it does with

quantitative easing, and that is highly

convenient for the government.

The test of whether the Bank is

truly independent will come later. It is

hard to think of many, or indeed any,

instances since independence in 1997

when the Bank has taken actions that

have proved to be very unpopular

with the government. For Bank

independence to be properly tested,

we would need the post-Covid

recovery in the economy to be

accompanied by the inflation that

some fear and for it to take action by

winding down this year’s

“emergency” quantitative easing

and gradually raising interest rates.

That is for later.

Central bank

independence has

done a lot for us.

But it is on trial.

‘‘

’’

David Smith is Economics Editor of

The Sunday Times

[email protected]

Katherine Griffiths is Banking Editor

of The Times

He may be chairman,

but Horta-Osório will

still want to hold court

Christine Lagarde heads

the ECB, recognised for

its independence

(30)%

Source: the company3Q19 3Q20

Credit Suisse third quarter income in

Swiss Francs, 2019 compared to 2020

1.1billion

800m