Sterling will go up and down. Firms must adapt, not moan

The services sector, which accounts for a growing share of UK exports, doesn’t seem especially sensitive to exchange rates. Manufacturing is more affected – but today’s most successful companies, including the Aga Rangemaster Group, which reported strong results on Friday, or the likes of Tata’s Jaguar Land Rover, specialise in upmarket, high-value added products and will therefore be able to shrug off minor currency fluctuations. They are certainly the way forward for British manufacturing.

The failure of macro-prudential policies

Every generation of economists believes that it has discovered the holy grail. Every generation ends up being bitterly disappointed. The most recent, fashionable “discovery” is a set of ideas known by the monstrously ugly moniker of “macro-prudential policies”. This means using various regulatory tools – and not just interest rates – to try to control the economy.

Banks can be told to hold more money back as reserves when the economy is doing well, thus reducing growth; borrowers can be prevented from taking on too much debt; there can be caps on mortgages; and so on. Crucially, these regulations can be loosened during busts to kickstart growth.

The Bank of England is one organisation that has embraced macro-prudential tools, for certain purposes: it believes that rates should be the last line of defence against asset bubbles and that macro-tools should be tried first.

So how effective will all of this be? A new report from the International Monetary Fund contains some answers: It analyses the effectiveness of various macro-prudential policies using 18,000 observations on 2,820 banks over 2000-2010.

It finds that countercyclical capital buffers are ineffective, and that “some measures are even counterproductive during downswings, serving to aggravate declines”. It finds that caps on debt-to-income and loan-to-value ratios and limits on credit growth and foreign currency lending can be effective in reducing asset growth. But it warns that macro-prudential measures could damage growth and the development of finance and financial tools, imposing large costs on the public.

It’s a mixed bill of health – and I’m more downbeat on the whole idea than the IMF. I suspect that the costs will be greater and that, in practice, the authorities will keep getting it wrong. Political and regulatory failure is always underestimated, and market failure always exaggerated. Relying on powerful, centralised planning never works.

allister.heath@telegraph.co.uk

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