Bank of England flashes warning signal

THE REAL question for the Bank of England is whether its touch on the brakes will slow the housing and consumption locomotive. In justifying a quarter-point rise in base rates to 4%, the Bank scatters its reasons far and wide including the world recovery and robust business surveys.

But at the core of its reasoning is 'resilient' household spending and borrowing and a strong housing market. Mervyn King and the Monetary Policy Committee are determined to head off an unsustainable boom. This is despite the fact that inflation is comfortably below the 2% target. Barring shocks, inflation is likely to remain below target two years from now.

Mortgage rates are comfortably low for those of us who remember the darkest days of the John Major years when the futile attempt to keep Britain inside the Exchange Rate Mechanism meant mortgages costing anything from 12% to 15%. Against this history, the hike in the standard variable mortgage rate to 6% should not, on the face of it, cause too much grief.

But what has to be remembered is that there is a whole new class of home-buyers who have stretched themselves to the limit. The psychological impact on a housing market - where starter homes cost £100,000 - could be more considerable than many people believe.

Moreover, we have not yet seen the end of the rates rises. A stronger pound should provide some protection, as the Bank recognises. But the money markets are still predicting a base rate of 5% by year-end, which could push mortgage rates to 7% or higher. The expectation of further rate increases to come, even if the rises are halted at 4.25% as economist Roger Bootle predicts, may also exert an influence.

While the Bank continues to show flexibility in its monetary policy, the European Central Bank remains as wooden as ever. If ever there was a moment it might have reduced rates to take upward pressure off the euro and give manufacturing a chance it was now, ahead of tomorrow's gathering of rich country finance ministers in Florida.

Not a bit of it. New ECB chief Jean-Claude Trichet is relying on words to talk the euro down and on world trade to lift euroland out of the rut. As we have seen in the United States, it requires real and sustained stimulus to dig modern industrial economies out of a hole. Trichet and the ECB have not risen to that task.

Oil shake-up

IT IS not in the nature of Shell man to be humble. So the abject apology from Sir Philip Watts (see below) - for hiding out while 20% of the group's reserves vanished overnight - is an advance.

But why shareholders should trust him to sort out the group's problems in his final 17 months in office is a mystery. Company chairmen, including Michael Green at Carlton, have been dumped for far less. More pertinent perhaps is the brutal sacking of Bob Horton from BP in 1992, which ushered in a period of change and unprecedented growth at Shell's rival.

The main fillip that Watts had for Shell shareholders was the promise of an 'open mind' on restructuring the group. It is a mark of the ossification of management processes within Shell that it is only now - with the City baying for blood - that he is consenting to look at the structure.

In the excitement over the missing reserves, no-one should take for granted the desultory nature of the group's overall performance. Oil reserves are still being depleted faster than they can be replaced. Refining and marketing in the US are still performing below expectations. Only a buoyant oil price - the luck of the Iraq war draw - allowed the group to produce improved profits.

Acknowledgement of mistakes never comes easy. Watts belatedly is promising four weeks of consultations with big-battalion shareholders. But it should be clear to all investors that if it is speed of change they want, Watts will have trouble delivering. They may not want to wait until 2013 and the Russian Sakhalin field to come on stream.

Leighton overstretch

ALLAN Leighton is an impressive executive who is making great strides in shaking up the Royal Mail. But even a person of his prodigious talents is in danger of becoming wildly overstretched.

He has added the deputy chair at Selfridges to his list of obligations, which includes being a senior non-executive at BSkyB (a bed of nails with its father-son chairman and chief executive), the chair at retailer Bhs, a role in the tangled affairs of Leeds United and a slew of other directorships.

Leighton should recognise that he is danger of devaluing his currency.