Business View: Bankruptcy is high. Inflation is low. The rate rise is pointless

I don't understand the logic. If the job of the Monetary Policy Committee is to keep inflation below 2 per cent - and inflation by the measure the MPC uses is 1.1 per cent - then why the heck did interest rates go up last week?

I don't understand the logic. If the job of the Monetary Policy Committee is to keep inflation below 2 per cent - and inflation by the measure the MPC uses is 1.1 per cent - then why the heck did interest rates go up last week?

We won't know the detailed arguments until the minutes of the meeting are published, but the MPC has helpfully put out a short statement about wage pressures and global inflation. The Bank of England is also at pains to point out that, although the target is 2 per cent, there is no timeframe for this. So while no one in their right mind thinks inflation will be 2 per cent this side of Christmas, the MPC is putting rates up early because inflation might accelerate in 2005.

This is crazy. The factors that might increase UK inflation are mostly beyond the control of the MPC. The upward push is largely coming from higher oil prices, higher commodity prices, the higher euro, higher utility bills, higher wage inflation and higher house prices.

If the MPC thinks anything a central bank or government can do will temper the housing market, then its members are no students of recent history. Government intervention to curb house prices has not just been ineffective, it has at times been counterproductive. Remember when Nigel Lawson ended double tax relief on mortgages, causing a mini-boom and an awful bust?

And anyway, house prices are not a component of the price index that the Bank is using these days to measure inflation, so you could argue that any attempts to control house prices are outside the MPC's remit. You could sue the Bank for acting ultra vires, although how you prove this in a court of law is beyond me.

If you talk to retailers, you'll get the impression that there is naff-all inflation around, anyway. Clothes, white goods, many brown goods and most groceries are cheaper than they were a couple of years ago. The internet has allowed people to price-compare for big-ticket items, and that is keeping down the price of cars.

People are willing to spend because of the availability of credit. And the MPC thinks it can rein that in by putting up interest rates. But that assumes consumers take interest rates into account before they run up bills on their credit cards. This requires rational thought, which is alien to most people when they flash the plastic.

What high rates will do is increase the woes of those already in debt. Personal bankruptcies have gone up 27 per cent in the past three months, and two-thirds of those were due to consumer debt.

Last week's rate rise will not stop inflation rising, even if inflation was a problem. It was aimed at controlling something that is not the MPC's to control, and that it couldn't control if it wanted to. It will make people poorer and increase the misery of the indebted. And there'll be another rise coming in the summer.

Don't rubbish RBS

My phone has been red-hot with moaning fund managers who do not like Royal Bank of Scotland's $10.5bn (£5.8bn) purchase of US bank Charter One. They argue that RBS is paying too much for the bank, that it will have problems integrating it, and that the £2bn share placing which is part-funding the deal will drag down RBS shares.

Tosh. RBS is paying less for Charter than the prevailing market price for US banks. Charter is a well-regarded bank which gives RBS a better geographical spread in the north-east of the US, and lots of opportunities for bolt-on acquisitions. And if the share placing does hold back RBS shares, then it shows how blinkered the market is.

RBS shares stand at around the same price they were three years ago. In that time the bank has integrated NatWest and a host of other deals, and been transformed from an ambitious regional bank into a global powerhouse. Its earnings per share have almost doubled.

So if those market Cassandras don't like RBS, then they can sell out to people who have faith in one of the UK's few world-beating companies.

j.nisse@independent.co.uk