Jeremy Warner's Outlook: Little reason for King's moment of self-doubt

Steadying BSkyB; M&S/Tony Ball
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The Independent Online

Central bankers are not gods, much as Alan Greenspan, chairman of the Federal Reserve, is often portrayed as one, so it is refreshing to hear Mervyn King, Governor of the Bank of England, candidly admit that he does not know how monetary policy will unfold over the next few months. Nor, he suggests, does anyone else. It all depends "upon the resolution of the many uncertainties currently facing us".

None the less, central bankers are expected to deal in certainty, and the intriguing thing about yesterday's statement is that Mr King seems to be suggesting that the Bank is more than usually unsure of what adjustments it will need to make to policy over the months ahead. Nor at his Inflation Report press conference yesterday was Mr King able to cast much light on the big question sitting there at the heart of Bank's deliberations - the soaraway housing market.

There were three things to consider, Mr King said. First, the extent to which house prices relative to earnings are above their sustainable level. Second, the prospect of any adjustment, or crash. Third, the impact of any change in housing prices on consumption. And the however is? However, "there is enormous uncertainty about all three factors". Well, thanks for that.

Mr King's feigned bewilderment is as much a tongue in cheek statement of the obvious truism that nobody can predict the future as anything else. Despite the precision of the Bank's Inflation Report forecasts, Mr King is plainly right to highlight the pitfalls of prediction. The unexpected resilience of the housing market is only one of the factors which have been confusing policymakers.

Another is the fast rising oil price, which again few policy makers would have predicted. Then there is the sudden reversal in stock markets, driven by the fear that the recovery in growth and profits is stalling even before it has properly taken hold. If that's the case, then perhaps central banks shouldn't be putting up interest rates at all. On top of all that comes the growing political crisis in American and Britain over the Iraqi war. Renewed instability in the Middle East adds a further ingredient to this already potent cocktail of uncertainty.

Yet sometimes it is best just to quit worrying, and despite all these imponderables, the Bank's central projections continue to point to a relatively benign outcome for the UK. The inflationary outlook is a little bit worse than it was judged to be in February, even though there has been a quarter-point rise in rates since then, but it is not so bad as to require a tightening in policy that goes substantially beyond already factored in market expectations. These envisage rates rising by a quarter point at regular three monthly intervals before peaking at around the 5 per cent mark. According to the Bank's forecasts, this would damage growth more than it limits inflation, but on neither count does the likely effect give any grounds for alarm.

Anecdotal evidence from the City and business suggest a now secure and quite widely based recovery, outside Continental Europe at least. Financial markets are for the time being gripped by fears of a systemic crisis caused by the unwinding of reckless positions built up during the years of easy money. There's good cause for concern, but to me the doomsday scenarios being painted by some look over the top and exaggerated.

As Mr King rightly points out, neither he nor anyone else can predict the future. Whatever happens, it won't turn out quite as anyone expected. Yet despite the outbreak of renewed turbulence in financial markets, there is greater cause for confidence right now than there's been in ages. The most dangerous waters seem already to have been successfully navigated. In the absence of a housing market crash or, heaven forbid, some further terrible terrorist atrocity, calmer conditions lie ahead.

Steadying BSkyB

It has been a lacklustre start for James Murdoch as chief executive of BSkyB. The shares fell 5 per cent yesterday on his second set of quarterly results and although it is plainly far too early to judge, the furore that accompanied Mr Murdoch's appointment, his youth and the fact he is his father's son is already putting his performance more under the microscope than most. The subscriber growth figures were disappointing and the City complains that it has yet to be given a detailed explanation of how Sky plans to balance the conflicting calls of top and bottom line growth.

Yet look beneath the surface and Mr Murdoch junior seems already to be doing rather well. During what is anyway a poor period for subscriber growth, BSkyB deliberately cut back on customer acquisition spending, thereby delivering a further boost to profits. With marketing spend now resumed, Mr Murdoch is confident he can meet his target of 8 million subscribers by the end of next year. No promises are made on whether the 16 per cent margin achieved over the last nine months can be sustained, but the fact that the company eventually aims for a margin as high 30 per cent, and that Mr Murdoch is heavily incentivised to achieve it, should give some cause for comfort.

When Mr Murdoch became chief executive, the fear was that once his father, Rupert, had got his son in the driving seat, BSkyB would embark on yet another hell for leather, and extraordinarily costly growth phase, so as rapidly to take subscribers up beyond the 10 million mark. This is, after all, the sort of thing Mr Murdoch senior likes to do. Yet the evidence of these figures is rather the reverse. If anything, James Murdoch seems to be even more fixated on the need to deliver good bottom line growth than his predecessor, Tony Ball.

The new chief executive needs to be more specific about how he's going to reach 8 million without trouncing BSkyB's profits again, and also what happens after the 8 million barrier is broken. Mr Murdoch has already eschewed the idea of overseas expansion, but with cable, ITV and free digital TV all now more formidable competitors than they used to be, it's hard to see where the growth is going to come from two years out. There's only so much each individual subscriber is prepared to shell out on Sky, and the target level for average revenue of £400 per subscriber may be close to that limit.

Mr Murdoch's pay package, potentially worth £10m over three years, is bound to raise eyebrows in the City, the more so as the targets governing two-thirds of the performance-related element of his pay aren't disclosed. That's because they are based on internal budgets, which are commercially confidential, says Sky, but this is precisely the sort of information the City wants to know. Is it subscriber growth, or profit that the company is most interested in chasing?

At the end of his fresher term, Mr Murdoch's report card reads: "promising student, good negotiator, particularly when if comes to his own affairs, but needs to be more forthcoming about what he's up to."

M&S/Tony Ball

Tony Ball, former chief executive of BSkyB, is being criticised in some quarters of the City for not making a bigger issue out of his decision to resign as a non-executive director of M&S. Mr Ball cited other work commitments when he quit the board in September 2002, but it has emerged that in fact he resigned in protest over the decision to appoint Luc Vandevelde as non-executive chairman on a big pay package. He thought this inappropriate, because Mr Vandevelde had too many outside interests and held too powerful a sway over the board.

It would be nice if non-executives aired their grievances more publicly, but though Mr Ball was proved ultimately right in his concerns, at the time he was in a minority of one, and I'm not sure it's fair to expect career executives to put their reputations at risk by becoming involved in a public boardroom row. Mr Ball behaved honourably in resigning when he found himself overruled, and privately he's not been shy in his criticisms of M&S since then. The City had all the information it needed to come to the same judgement as Mr Ball, but didn't. Shareholders only have themselves to blame for their mistake in allowing Mr Vandevelde's elevation.