Interest low in Bank short on consensus

The UK, like the world's other leading economies, is now looking towards higher interest rates to combat future inflation. But, whereas the turn in American rates has started already and that in Europe is seen as coming later this year, the timing of the change in Britain is much more uncertain. On balance, however, the Bank of England's August inflation report appears to suggest later rather than sooner.

It is worth noting that, although the inflation profile in the UK is not notably worse than that of our US and European competitors, both nominal and real short-term interest rates are higher. This gives the monetary policy committee some leeway before signalling an upward shift.

The analysis, as laid out by deputy governor Mervyn King, struggled hard to come up with negatives on the inflation horizon. However, two years out the Bank does see prices rising by 2.75% unless pre-emptive action is taken.

Looking across the spectrum of indicators the inflation warning signs from the monetary data are clearly there, with the narrow money supply growing rapidly. Mortgage lending has also been rising more strongly, consistent with a pickup in the housing market, although Mr King was thoughtful enough to point out that the boom in his own Notting Hill neighbourhood was not representative of the rest of the country.

In fact, the Bank appears much less concerned by an unsustainable housing boom, of the kind which took place at the end of the last decade, than some of the commentators. But it does concede that the ratio of house prices to average earnings will increase.

In the real economy of output and jobs, the MPC does see the economy picking up speed more quickly than it had anticipated following the upward revisions of growth in the first quarter of this year. The Bank argues that consumer and business confidence are rising. Looking across the broader horizon, the MPC also sees a healthier global outlook, despite stagnant German output in June. It now sees UK output climbing over the short-term until it peaks at 3%.

The big question about this output profile is what the effect on earnings will be. The pause in the economy in the second half of last year appears to have had a dampening effect. Private settlements have fallen and inflationary expectations have been lowered. Overtime and bonus payments are down. This despite the fact that unemployment is at 20-year lows. The MPC concedes that this may reflect fundamental changes in the way in which the economy now operates as a result of labour market reforms, but adds there is still "uncertainty" about this, which may prove to be a key to the next rate move.

The final piece of the puzzle, discussed by the MPC, is the trend in prices themselves. This too is linked to global demand, with the assumption that as the world economy picks up the price of non-oil commodities will too, although in the UK's case, a firm value for sterling may continue to provide a measure of insulation against this influence. Perhaps more seriously, the MPC also suggests that the benefit of low oil prices may dissipate over its two-year forward profile.

There is plainly no consensus in the Bank as yet on the timing of a rate increase. Mr King himself argues there is no room for complacency. But others on the MPC, including, presumably, DeAnne Julius, argue that the inflationary risks are less pronounced. The doves are almost certainly right. But they have less riding on the outcome politically than the ambitious Mr King.

BSkyB's goals


The challenges facing BSkyB, Britain's most successful subscription TV service, are formidable. It is having to buy in subscriptions to its leading-edge digital services as it sheds analogue customers. The effect on the bottom line has been considerable and was a contributory factor in the profits collapse to £73m for the year from £271m. Still, in this age of new technologies, it is reach in terms of subscriptions rather than earnings that appears to attract analytical attention.

The second negative is in the boardroom. Although BSkyB likes to play down the tension at the top, arising from the arrival of an empowered second big shareholder in the shape of France's Vivendi, this is clearly a concern. The assumption is that Vivendi will eventually seek to use its stake to weaken the Murdoch stranglehold and create a pan-European broadcasting force.

The third threat is technology. The satellite digital revolution is really a case of the tortoise and the hare. BSkyB may have been quickest with the box, so to speak, and ONdigital, the terrestrial digital supplier, may have been left in the shade. But the real challenger, cable, will yet make its mark. The combination of Cable & Wireless Communications with NTL creates a really competitive means of delivery. Although BSkyB intends to start experimenting with interactivity later this month, when Arsenal play Manchester United, the satellite link does not offer the same technological capability as cable, particularly as digital and the internet converge - a trend spotted by Gavyn Davies in his report on BBC funding.

Sky, like some of its American counterparts, is using content rather than delivery as its battering ram. If that does become the case, then analysts are almost certainly wrong to be so focused on subscriber numbers which could unwind. No wonder BSkyB is trying to strengthen its hand in the battle for content by acquiring additional stakes in Premiership football.

Fickle fashion


It is not just BSkyB which recognises the marketing power of football clubs. The insurer and pensions group Legal & General, which has already spotted the potential for selling stakeholder pensions to such worker groups as hairdressers, has turned its sights on football clubs. The plan is to offer shareholders/members of Nationwide and eventually, perhaps, Premiership clubs a package of financial services including pensions. This appears a good marketing ploy. But pensions are forever, whereas soccer is a fickle fashion item.