Bank has a not so nice day

MERVYN King invented the phrase the 'nice decade' to describe the 1990s. Now the governor of the Bank of England is sounding far more cautious. The immediate outlook for growth, inflation and interest rates does not seem too alarming.

But project forward a year or so - just as Labour seeks its third term in office - and it all might look different, with official interest rates at 5% or higher.

We should not be surprised that the Bank has raised its inflation projections even though the consumer prices index signals no danger.

Commodity prices are on the rise, with the cost of oil up 28% this year.

As Middle East tension rises by the day, who could say we are not in for another oil price shock? There are already indications that secondary effects from soaring fuel prices are coming through, as in the BA surcharge.

Earnings, too, are rising. Partly, the 5.2% increase in the April figures can be explained by bonuses, but this is pay by any other name. Stripping out incentive payments, earnings are still up by 3.9%.

Moreover, with unemployment falling, capacity for expansion is being denuded, though immigration may make this less of a problem.

What most people will be worrying about is what the Bank's assessment means for mortgage rates and the housing market. King refused to be alarmist and does not recognise terms such as crash and bubble.

But he does concede that interest rates are set on an upward path - even at 4.75% (half a point higher than at present) inflation will be above target - so some kind of flattening of house prices is inevitable.

Interest rates, saturation in the buy-to-let market, increased housing supply, less capacity to borrow as after-tax incomes trend down; all of these point in the direction of a house price slowdown - even a fall - over the next couple of years.

Nothing goes up for ever. It is not quite the crisis of the early 1990s yet, but if house prices were to continue to swell at current rates, we could face real trouble quite quickly.

With house prices reaching their limit, unsecured borrowing at unsustainable levels and interest rates on the rise, the present exceptional level of economic growth - above 3% - will start to come down.

That may also expose the dangers of Gordon Brown's public spending splurge as the deficit rises. And none of this includes any unexpected shock like a long-term spike in energy costs.

Equity markets took fright earlier this week as hedge funds started to unwind their positions.

There may be more to come as investors begin to realise that the era of benign inflation and low interest rates is shuddering to a halt.

James's gift

MOST people shifting jobs across continents can expect help from their employers in the shape of a one-off payment. But, if you are a media tycoon, the rules work differently. James Murdoch, 31, chief executive of satellite broadcaster BSkyB, is to receive £200,000 a year, for each of the next three years, to cover his relocation costs.

This is just a minor part of the £10m three-year package which BSkyB is having to pay Murdoch the younger to prise him away from the Star satellite channel in Hong Kong.

The manner in which the BSkyB board is handing over the keys of the safe to the new chief executive does not come as a great surprise.

His father Rupert is chairman and the group has a dysfunctional board apparently only too willing to listen to the master's voice - as was the case when it came to choosing a successor to Tony Ball.

The sudden departure of former Goldman Sachs boss John Thornton looks a curious coincidence.

Shareholders might point out that James's package is a small price to pay for genius. After all, profits at the group are soaring.

But looking to the future, investors might be wise to focus on the slowdown in digital subscribers and wonder if the 8m target by the end of 2005 is really achievable, especially if the consumer starts to smell harder times ahead.

It is no use Sky saying it took 'independent' advice on Murdoch the younger's contract.

Investors need to know who gave the advice, why the nonexecutives signed off on it and whether the governance reforms, promised at the time of James's appointment, have been delivered.

While they are at it, they could also provide a full account of inter-group transactions, to give a clearer impression of the sources of revenue and profit. Then we will know that the group is committed to transparency.