Rates question foxes Square Mile hawks

Last week it looked like a no-brainer. Interest rates were not just going up, they were going up at the next meeting of the monetary policy committee in early July. Soaring house prices, the explosion in consumer debt, the pace of retail spending all called for immediate action from the Bank of England.

In one sense, the economic logic for higher rates is inescapable. The cost of borrowing was reduced to historically low levels late last year as an emergency measure to safeguard against a post-September 11 recession. Now those fears are diminishing there is no need for the Bank to keep rates artificially low.

But that was before yesterday's inflation figures. To be sure, the data was flattered by a few funnies. Food prices last year were affected by dreadful weather, which meant that last month's small fall in prices was magnified. The same applies to the cost of petrol. Even so, the inflation figures were stunningly good: the rate excluding mortgage interest payments has never been lower since the index was launched 27 years ago. The cost of living is not simply being curbed by favourable base effects but by the competitive pressures on retailers. House prices may be going up at almost 20% a year, but the cost of furnishings is down by 1% and electrical goods are 3% cheaper than a year ago. Consumers are reaping the benefits of globalisation at the expense of profit margins - good news for inflation, bad news for share prices.

City interest rate hawks were adamant yesterday that the MPC should be forward-looking, and concentrate on the inflation dangers ahead rather than the benign conditions of the past. That argument, however, would have more merit had the Bank not consistently undershot Gordon Brown's 2.5% inflation target for 34 of the past 36 months. As Sushil Wadhwani argued in his speech on leaving the MPC, the tendency to overestimate inflationary pressures has meant growth has been lower than necessary.

Yesterday's data does not mean rates will stay at 4% for ever. The next move is still going to be upwards. But with inflation so far below its target, it does imply that the first rise has been delayed and that the peak will be lower than the hawks anticipate. Perhaps a lot lower.

Banana skinned


We should not be surprised that it was Electricité de France which yesterday won the auction for Seeboard. In the big league of European energy firms, EdF's appetite is larger than anyone's and, at a mere £1.4bn, the French taxpayers who are EdF's ultimate owners won't notice the difference. When Edf enters an auction, it usually wins.

EdF's ambition is to paint what it calls a "blue banana" across western Europe. Blue is its corporate colour and the banana describes the arc through the wealthier parts of the region, from Spain through France, Germany and the Benelux countries up to Scandinavia. Seeboard, plus London Electricity and Sweb, which it bought in 1999, hits the spot called southern England.

Nobody doubts Edf's technical abilities in getting electricity to the consumer - it seems to have made a better fist of London Electricity than the last US owner - but woe betide say, our own Centrica, if it ever thought of expanding into France. Edf is not in the business of selling its power stations and its retail market is a legal monopoly.

The French, after years of grumbles from the rest of the Europe - Italy even passed an "anti-Edf" law - have finally agreed in principle to open up the domestic retail market some time in 2004, though with so many elections to worry about, politicians are thin on detail.

At the time of the Sweb purchase, the government here made angry-ish noises about the way the French liked competition in other countries' energy markets but not their own. Nothing came of these objections, and it's a safe bet that nothing will this time, either.

But the fact is that the French state now has 5m customers in Britain to help mop up the surplus from its overcapacity of nuclear power stations. It is probably not the way that privatisation of the UK market was meant to work.

Fat cattery


When we huff and puff about soaraway executive pay, the tendency is to concentrate on the big guns - Gent at Vodafone, Reid at Logica and the rest. But it is a problem that permeates companies of every size in every sector.

Step into the pedestrian business of selling beds and home furnishings, for instance, and look at Homestyle, which seems to have a store on every high street with names like Harveys and Rosebys. Acquisitions have helped increase turnover from £184m to £600m in five years, but profitability has remained erratic. Homestyle made £17.5m at the pre-tax level last year, against £13m in 1997. So margins have been destroyed. The share price hasn't done much either, growing at 4% compound.

That hasn't held back chief executive Michael Rosenblatt, who has just bagged a £200,000 annual bonus as part of a 20% rise in his package to £537,000. Oh, and he's in line for £1m of free shares if the company hits certain performance benchmarks.

Those on the shop floor, meanwhile, were restricted to single-digit rises last year. And the average salary is £11,430 - or about 2.1% of the boss's.