Jeremy Warner's Outlook: How high must the Bank of England go on rates as inflation rears its head once more?

BP: Texas highlights much deeper issues; FSA's gamekeeper wants to be poacher
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The Independent Online

So now we know why the Bank of England raised interest rates last week. The markets were as wrong about December's inflation rate as they were about the rates decision. They'd expected something comfortably lower. In the event, the inflation figure avoided by the slimmest of margins the level which would have forced the Governor, Mervyn King, to write an open letter of explanation to the Chancellor.

Yet at 3 per cent, as measured by the targeted Consumer Prices Index, it was quite bad enough. What's more, under the old measure of RPIX, the Governor would indeed have had to write that letter. Meanwhile, the preferred measure for wage bargaining purposes which includes the cost of mortgages, the Retail Price Index, is inflating away at a 15-year high. Focus on the things that people are forced to buy on a regular basis, and the inflation rate is more alarming still.

The Bank of England reckons that wages rising at 4.5 per cent would definitely trigger second-round inflationary effects. If the RPI is inflating at 4.4 per cent, that looks a real possibility. Higher mortgage rates in combination with higher inflation means squeezed disposable incomes. With the economy still growing at a fair old clip and unemployment not yet much of a problem, workers will seek to compensate with higher wage demands.

Not that the letter, if it had to be written, would be a difficult one to pen. In fact, it could be articulated in just one sentence, along the lines of: "Dear Gordon, If you hadn't put up excise duties in the pre-Budget report, or imposed university tuition fees, I wouldn't be writing you this ruddy letter, Yours, Mervyn". Yet this is not the whole story. Nor is it particularly meaningful to cite higher oil and food prices, both outside the Bank's direct control, by way of excuse, or indeed the strong likelihood that with now lower oil prices, inflation should begin to ease again soon.

At his monthly press conference yesterday, the Prime Minister, Tony Blair, brushed aside implied criticism of rising inflation by saying that it was rising almost everywhere. Up to a point, this is true, but only in places such as Hungary, Latvia and Estonia is it rising faster than Britain. Among larger, developed countries, only in Spain at 2.7 per cent does it come anywhere close. The comparable figure for France is 1.6 per cent. In Germany, it is 1.5 per cent and even in the US, it is just 2 per cent.

Mr Blair may be right to insist that after four years of robust growth in the world economy, inflation is back on the agenda for policymakers almost everywhere. Where he's being misleading is in trying to make out that we are all in the same boat. Here in Britain, we have a rather bigger problem with the phenomenon than elsewhere.

One of the primary causes of it, moreover, may be the very rapid growth in the public sector that the Labour government has itself been pushing through. This has helped save the economy from the sluggish growth and outright recession experienced by some others, but the consequences are now showing through in very limited spare capacity and rising prices. Nearly half the increase in spending on the National Health Service has been eaten up by higher wages. That sort of phenomenon is bound to have inflationary consequences.

I hope the prevailing view is right that, with a slowing world economy, just one more quarter point rate rise would be sufficient to put inflation back in its box. Yet I fear it may not be enough. Regrettably, a 6 per cent interest rate looks all too possible, even if it is not yet the most likely outcome.

BP: Texas highlights much deeper issues

There but for the grace of God... This seems to be the almost universally held view among Lord Browne's peers over the Texas City oil refinery blast. In a Mori poll conducted as recently as last month among captains of industry, they again voted him Britain's most impressive business leader, this despite a series of disasters, including Texas City, serious enough to prompt the BP chief executive's early departure.

I'm not sure, however, that on reading yesterday's report by the former US Secretary of State James Baker on the Texas explosion, they would want to be thought quite so careless as BP with the safety of their own employees. This is in nearly every respect an extraordinarily damning document which finds that the company routinely put profit before safety. The explosion was not just a question of bad luck, but rather one of management failure, and, in particular, failure to spend sufficiently on process safety.

To be fair, the Independent Safety Review Panel expresses the view that the safety problems it has found at virtually all BP's US plants are probably not unique to BP. It is quite likely that other oil majors have been equally negligent. Yet it is BP that has been caught with its trousers down. A series of other mishaps, including the problem of oil spillages from corroding pipes in the Prudhoe Bay oil field in Alaska, suggest wider, systemic failings at a company previously thought of as a rare example of world-class, switched-on British management.

To judge by this event, BP is not what it says on the tin. All the highfalutin statements of best practice are exposed as mere lip service. In examining Lord Browne's legacy, most commentators have chosen to focus on his achievements which, let there be no doubt, remain considerable. Through a number of well-timed acquisitions he's made the company into a giant on the world stage.

However, as the chief executive in waiting, Tony Hayward, has already observed, the culture of "more for less" which runs through the organisation like a stick of Brighton rock has not always served BP well. At his press conference yesterday, Mr Baker lamented the fact that Lord Browne had not shown the same qualities of leadership in process safety as he has done on the environment.

Ensuring safety is not just a moral obligation for business leaders, for the consequences of failure are not confined merely to matters of conscience. As Lord Browne and his company have discovered, there is an equally important business purpose in ensuring a well-run ship. The costs of failure, in terms of reputational and bottom line damage, can be extreme.

Lord Browne's still extraordinarily favourable press points to a wider cultural problem in the way British business is analysed and written about. In Britain, we seem to celebrate our business leaders more for their deal-making and cost-management prowess than their ability to develop new, exciting and growing markets that genuinely change the world we live in. Where are the Bill Gates and Steve Jobs of the British business scene? For the time being, we must make do with Lord Browne as our most admired. With some justification, many Americans find the notion quite laughable.

FSA's gamekeeper wants to be poacher

Hanging around long enough for some disaster to overtake him is not a mistake that John Tiner, chief executive of the Financial Services Authority, intends to repeat. More so even than big, bad oil, this is a virtual certainty in the world of financial regulation. However good Mr Tiner is at his job, as sure as night follows day there will be a calamity for which the FSA will get the blame.

As it is, financial and economic conditions have rarely been so benign. Time now to bow out while the FSA is on a high note. Mr Tiner was quite ill a year or two back with a potentially life-threatening disorder. He's now fully recovered, but any such experience is bound to concentrate the mind on what to do next. Still a comparatively young man, he won't be short of offers, though it will be a year before etiquette allows him to cross the great divide from regulator back to the City regulated.

j.warner@independent.co.uk

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