Cagey King tightens reins

THE central message of the latest Inflation Report from the Bank of England is unmistakable. Growth is turning out stronger than forecast and inflation is likely to remain above target for the next two years.

As a result, last week's quarter-point hike in base rates to 3.75% is likely to be the first of several. Just how far rates will rise remains unclear, but they could go to 5%.

Mervyn King was at pains to point that the Bank did not believe that a series of rate rises would lead to an early-1990s style disaster with negative equity and financial stress for large swathes of the population. Instead he opted for a gentle warning to householders to be watchful of debt levels.

The potential for trouble is very clearly on the radar for the Monetary Policy Committee. The Bank has commissioned a special report which seeks to establish which income groups would be hurt by higher interest rates.

King admits that the Bank was mistaken when it expected house prices to flatten out this year. But it does believe that the adjustment will still take place. He noted that the rate of growth of consumer spending has been heading downwards, rising at 0.5% over recent quarters, against 1% each quarter over the previous five years.

The governor left the distinct impression that he was unworried by the credit explosion. He noted that despite some criticism of lending practices, at present only 20% of homeowners were faced with a debt of nine-tenths of their home's value. More than a decade ago, the figure was over 50%.

King remained confident that in an age of open and free capital markets there was no point in imposing reserve requirements or other measures on lenders to curb lending. Interest rates remained the best instrument.

In what some will see as a warning shot to the Chancellor, he also was clear that he did not believe 'fiscal policy' would be a useful tool for making short-term corrections to the economy.

If King did have a criticism of lenders it was over their treatment of savers. 'The real lenders are savers,' King asserted.

He suggested that the savers 'shop around' and put their money into institutions which were passing on the higher rates. Among the reasons rates will have to rise further is the Bank's belief that after a downturn in the cycle - during which Britain continued to grow - capacity in the economy is shrinking.

This is borne out by the latest unemployment data showing the number of people claiming benefit is the lowest since 1975.

Indeed, as the chart shows, Britain has the best unemployment record among the Group of Seven top economies.

It is worth noting, however, that part of the future inflation risk arises from the cash being poured into the public sector. Average wages in this sector - where productivity is falling - are climbing by 5.6%. In the private sector they are going up just 3.1%.

As they might sing on the football terraces: 'Are you listening Gordon Brown?'

Charm offensive
FRANTIC last-minute lobbying is underway to bring BSkyB outside shareholders back on board before tomorrow's agm.

The latest to be granted 20 valuable minutes of new chief executive James Murdoch's time are the activist investors at Morley.

Turning Morley around may be a trifle tricky. It has been among the most public in its criticism of Sky governance - notably the number and size of transactions with other parts of the Murdoch empire.

Even the magnificent Lord St John of Fawsley, the senior non-executive who thinks we at the Mail are 'too rude' to be on his phone call list, is turning on the charm.

His message to the Wall Street Journal is that the board would 'strongly favour' a resumption of the dividend.

Just in case any of us doubted Lord St John's independence of News Corporation - which owns 35% of BSkyB - he described News Corp's comments on the selection process as a 'bloody nuisance.'

He had better hope that shareholders do not regard him in the same light tomorrow and vote him out of a job for failing to prevent young Murdoch's appointment.