King's no more Mr Nice Guy

THE little-noticed drop in the pound on the foreign exchanges is starting to worry Mervyn King. In a speech in the rarefied setting of the Eden Project in Cornwall, the Bank of England governor noted that since August the pound had fallen 4% against Britain's major trading partners.

He also said the money supply is still buoyant despite the Bank's five quarter-point increases in interest rates since November 2003.

King's cautious comment would suggest that the tightening which carried the base rate up to 4.75% might not be over, despite the latest benign inflation data.

Figures just released show that the consumer prices index rose just 0.1% in September, bringing the annual inflation rate down from 1.3% to 1.1%. Far from being in danger of breaching the 2% inflation target set by the Treasury, King may end up writing to the Chancellor to explain the undershoot.

The tone of King's remarks suggest he and the Monetary Policy Committee might want to consider pre-emptive action and raise rates in the coming months.

The combination of a weakening pound and soaring credit creation is a poisonous combination that has led to problems for the British economy over the decades.

King is clearly pleased that his interest rate actions so far have contributed to a slowing in the economy. He notes that consumer spending has eased to a more sustainable rate which is making more room for public spending and investment.

But the economy is in the curious, almost un-British, position of facing strong pressure on productive capacity and below-target inflation.

One factor that might slow the economy is oil prices, which King notes are at their highest for 20 years in real terms. But he fears that the combination of stable inflation and falling unemployment 'must come to an end at some point'.

King's phrase for the current situation is the 'not-so-bad' decade to replace the nice decade.

But if the pound were to depreciate further we should not rule out more badness in the shape of a rise in base rates to 5% in the coming months.

Equity gloom

ADAIR Turner has done a terrific job in amassing the facts on Britain's pensions system. His hefty interim report contrasts favourably with the lightweight offerings we have seen from the Department of Work and Pensions and the Treasury since Labour came to office.

Moreover, he has chosen not to skip over Labour's 1997 tax raid on corporate pensions that dealt a serious long-term blow to stock market investment.

But he is also critical of the pension-fund industry. He notes it has a long history of over-investing in equities and that it should have learnt its lessons in 1974 when shares lost 50% of their value and did not regain their composure again until 1980.

The past was quickly forgotten and the average real returns on equities from the low point in 1974 to 2000 reached an incredible 13% a year.

It was these exceptional investment gains, or 'irrational exuberance', as Turner calls it, which allowed most trustees of defined benefit schemes to put off the hard decisions about increased contributions and later retirement ages that are now required.

Turner argues that their decline was inevitable. He may be right in that such schemes were much more sensible when employees tended to stay in the same job for a lifetime.

What is unconscionable is that companies changing to more flexible defined contribution schemes also saw it as an opportunity to lower their contributions when they are needed most.

Despite now working for stockbrokers Merrill Lynch, Turner appears to be negative on the future of equity investment.

There is little doubt that, partly due to the tax overhang from Brown's pension raid, Britain's stock market has underperformed for the last seven years. But the century-long investment tables compiled by Barclays and others show that over the long haul, shares still provide the best returns.

Unless financial history has been rewritten, Britain's stock market is due to rekindle some of the missing exuberance.

Rose watch

MARKS & Spencer was doing its best to disown its latest sales figures, arguing there are only two weeks of new data.

But the City was not amused. Broker Citigroup noted that the first sight of sales for the autumn clothing ranges was not pretty. Food sales also are going from bad to worse.

It is far too soon for Stuart Rose to take any blame. But that will not stop the critics.