Wednesday, 16 February 2011

A good day for senior management at Barclays; a terrible day for the rest of us

Yesterday, the consumer price index was published, showing that prices are rising at 4 percent a year. The governor the Bank of England tried to explain this outrageous number by suggesting that higher prices are due to temporary factors. He must have forgotten that UK inflation has been consistently above the two percent target since 2006. Perhaps Mr. King operates on another temporal dimension, but nearly five years of above target inflation doesn't sound that temporary to me.

Under normal circumstances, a responsible central bank wouldn't hestitate to raise interest rates in the face such an appalling degeneration of the inflationary environment. However, nothing is normal about current UK macroeconomic policy management. Yet, even as the inflation numbers deteriorate at an alarming rate, Mr. King continues to resist the idea of raising interest rates.

His reluctance stems from a belief that protecting the UK banking system is more important than confronting inflation. Banks are undercapitalised and keeping interest rates low boosts their profitability. Banks can now borrow funds from the central bank at 0.5 percent and buy a government bond for 4 percent. Making money has never been easier.

With such a benign monetary regime, it might be reasonable to think Mr King should expect some reciprocity from commercial banks. It would be helpful if banks shared his concerns about undercapitalisation. Profits could be pumped back into banks to strengthen their balance sheets.

Today, Barclays had an opportunity to respond to all that love and kindness from the Bank of England. It published their end of year results. What did Barclays do? They gave their staff a huge pay increase. Last year, staff costs increased by an astounding 20 percent.

As our collective living standards are slowly crushed by higher prices and stagnant wages, we can ponder on the delicious irony of that extraordinary pay increase. Our central bank has engineered a rapid increase in inflation, either by accident or design, so that Barclays bank can increase salaries, in real terms, by 16 percent.

1 comment:

Anonymous said...

How do they get away with it?