Jeremy Warner's Outlook: Would the MPC have been so hawkish had it known markets were in for such a pounding?

Minutes to the last meeting of the Bank of England's Monetary Policy Committee, published yesterday, indicate a decidedly hawkish shift in sentiment. Would members still be as certain in their views had they been meeting today, with a now quite serious stock market correction staring them in the face?

At the MPC's 3 and 4 May meeting, members unusually managed to split three ways on rates. The majority voted for no change, but Stephen Nickell's now customary vote for a rate cut was matched by the former Goldman Sachs economist David Walton voting for a rate rise.

His conversion to the cause of higher rates is all the more remarkable as he was one of the MPC members who went against the counsel of the Governor, Mervyn King, and forced through a rate cut last summer.

In judging the mood of the MPC, Mr Nickell's vote can reasonably be discounted, as he's been arguing for a further cut for absolutely ages and in any case has retired from the committee. In voting for a rise, Mr Walton by contrast represents a wider shift in sentiment on the MPC which was articulated in last week's Inflation Report.

Higher energy prices are causing inflation to drift above target. There are similar inflationary pressures in both the US and the eurozone. The Bank of England has also hardened its view of the amount of spare capacity in the economy, which in yesterday's minutes is referred to as "likely to be small". If spare capacity is as limited as the Bank believes, then there is equally little room for non-inflationary growth. Ergo, rates must go higher.

But hold on a moment. Aren't equity markets falling because they fear the present four-year expansion phase in the world economy is about to come to an end? With yesterday's precipitous 2.9 per cent plunge in the FTSE 100, the London equity market has given up virtually all of this year's gains, having fallen by about 7 per cent in just four trading days.

In less than a week market sentiment has turned on a sixpence; gone is belief in the high-growth story. In its place are fears of a global slowdown triggered by higher interest rates, and possibly even a recession in the US if consumption nosedives.

The reason why the London stock market fell proportionately more than others yesterday is because of its high weighting of oil and mining stocks. These companies are in the front line of any weakness in the world economy. As interest rates rise, commodity prices fall, punctured by the realisation that higher interest rates mean lower demand. If markets are already beginning to price in a sharp slowdown, do interest rates need to rise at all? It's an interesting chicken and egg question, for if interest rates don't need to rise, then equity markets may not need to fall.

For the time being, the turmoil of the past four days still looks like more of a correction than the start of a prolonged bear market. That comes only if US consumption really does take a beating. None the less, we've plainly got an anxious couple of months ahead as investors try to figure out from which direction the economic winds are going to blow. Small wonder the MPC is at sixes and sevens. These are choppy waters.

Go-ahead for new nukes, but who pays?

Never mind the continued opposition of some environmentalists, the Prime Minister's commitment to put a new generation of nuclear power stations "back on the agenda with a vengeance" raises the bigger question of how on earth they are going to be paid for.

The great bulk of Britain's post-war civil nuclear programme was hopelessly uneconomic; it could never have been justified at all had successive Governments realised what the costs to the taxpayer would be.

Even counting this investment as sunk capital, nuclear struggles to cover its operating costs when electricity prices are low - witness the insolvency four years ago of British Energy, the main repository of Britain's existing nuclear power stations.

This time around, there are to be no subsidies from the taxpayer; that much the Government has made clear. So who picks up the bill? The nuclear industry insists that the game has changed fundamentally since Britain first waded into nuclear power generation. Costs are now more predictable, and the latest reactor designs are more efficient. Furthermore, they produce much less nuclear waste, making disposal too less of a problem than it was.

In a submission to the Government's energy review, Areva, the French nuclear power station builder, went so far as to say "there is no need for any financial support or subsidy from the Government for new nuclear build". This is a view widely shared in the nuclear lobby. Indeed, a study in 2004 by the Royal Academy of Engineering claimed that even taking account of much heavier capital costs, nuclear was only marginally more expensive than gas and quite substantially cheaper than coal-fired generation. The higher capital and operating costs are cancelled out by lower feed fuel costs. If coal and gas are charged for their carbon costs, the numbers look better still.

Areva attaches only four conditions to its insistence that new nuclear can be built without subsidy. First and most important is that planning permissions are forthcoming in a speedy manner. Nor is anyone going to build fresh nuclear capacity while there is no long-term provision for waste disposal. Third, the transmission network has to be modernised to enable the new stations to connect to the grid, and fourth, the Government must give a clear-cut policy commitment. Only the last of these conditions looks like being met any time soon.

But even if all conditions are eventually satisfied, is it really likely the private sector would be willing to take on the entire risk of financing, building and operating the new plants when the future course of supply, demand and prices is so uncertain? Somehow I doubt it.

The Prime Minister hardly helps by promising alongside his new commitment to nuclear a "big push" on renewables, and a "step change" to encourage energy efficiency. According to some estimates, energy consumption could be cut 20 per cent if households and businesses were properly incentivised to become energy efficient. That amounts to the whole of nuclear's present contribution to the energy mix.

No, the truth is that there simply won't be any new nuclear build until the Government in some way underwrites it.

This doesn't have to be through the mechanism of direct subsidy. The same effect could be achieved by imposing an obligation on suppliers to source a set percentage of their power from nuclear. A similar mechanism is already applied to encourage the use of renewable sources of power generation.

The effect would be that if nuclear does again turn out to be uneconomic, consumers would be forced to foot the bill. This may seem an equally unsatisfactory approach to the problem, but it is hard to see how else the private sector can be persuaded to finance the new stations.

Not that the Government's belated conversion to the nuclear cause excuses the disgraceful absence of anything amounting to a cohesive energy policy this past nine years.

While ministers have busied themselves with largely pointless targets and goals for reducing "energy poverty" - all of which, by the way, have been missed by a country mile - it seems almost wholly to have forgotten the fact that our own reserves of oil and gas are fast running out.

In making his nuclear commitment at the CBI annual dinner this week, the Prime Minister presented it as some kind of shocking revelation that 80 to 90 per cent of our energy needs will be dependent on foreign imports by 2025 if nothing is done. The CBI and others have been warning about this eventuality for years. On energy as on so much else, the Government has been sleepwalking into a crisis largely of its own making.

j.warner@independent.co.uk