A season for falling leaves and rising interest rates

So here's the scenario. You are a member of the Bank of England's monetary policy committee. You're worried that the last cut in interest rates was one too many.

Evidence is coming in that cheap money is encouraging consumers to load up on debt, has provided a fresh upward twist to house prices, and is turning round activity in all sectors of the domestic economy faster than anticipated. You are also none too happy about the government's planned autumn changeover in its inflation target from 2.5% on the retail prices index to (an expected) 2% on the internationally used harmonised index of consumer prices. The RPI is showing inflation above its target, thus providing a good reason not to cut rates, but inflation on the HICP measure is well below 2%, and you fear the switch may fuel speculation of further rate cuts, thereby intensifying what you consider to be an unwise and unsustainable spending boom.

So what do you do? The first thing you try is a stiff warning to consumers that the good times are unlikely to last for ever. Paul Tucker, one of the nine members of the monetary policy committee, tried that last week, noting that real interest rates were well below their long-term average.

But jaw-jaw does not always work, and there has been nothing in this week's barrage of data to suggest that consumers will take the slightest heed of the Bank's misgivings. Or even that they have registered them.

If you are sure that the pick-up in activity is not just another false dawn, how long do you wait before taking more aggressive action, pushing up interest rates in an attempt to force borrowers to control their habit? The answer is probably not all that long. The question of whether the recovery is durable remains a big "if" but the minutes of today's MPC meeting may show an unsheathing of the hawks' claws.

Indeed much more data like those we have seen this week could tempt the Bank to move this autumn before the change to the inflation target makes a pre-emptive strike harder to sell.

Rally in context


The stock market also seems to have detected the scent of good times. The FTSE 100 and many other European indices ended yesterday at or near their highest levels of the year.

The interesting part of this mini-rally is that much of the action is coming in cyclical stocks, especially the formerly bombed-out areas of technology. Witness the 20% surge in LogicaCMG's share price yesterday on results that were solid but hardly sensational: operating profits, after all, were actually down 22% on the previous six months.

Over in Germany - one of the culprits behind the OECD's forecast of lower growth for the eurozone - they are getting excited by their banks. Deutsche and HVB were among the big risers yesterday as both made positive noises about their ability to control costs this year.

While cost control in the banking sector and the return of tech companies from the wilderness represent good news, it does not add up to a substitute for old-fashioned organic growth. That is the factor that has been absent, with a few notable exceptions, from the corporate reporting season.

It is also the factor that will determine the market's medium-term progress and the reason why investors, and not just monetary policy committees, have reason to be worried about the free-spending mood of consumers: until harder evidence is seen in corporate profitability it looks premature.

This mini-rally also needs to be seen in context. It is tempting to make comparisons with the lows of March, when 3,277 was seen on the FTSE 100, but that event was driven by a combination of irrational panic and forced selling. A fairer starting point is the 4,000 mark at which we started the year; a 6.5% rise since then is welcome progress, but do not confuse it for the sunlit uplands.

Planning nightmare


Whatever the merits or otherwise of Associated British Ports' desire to build a new container port at Dibden Bay close to Southampton and the New Forest, the procedure it has been forced to go through is surely wrong.

ABP, the country's biggest docks operator, has been trying to win approval for its six-berth complex since 1996 and to date has spent £38m in the process.

The company has been forced to fund the cost of the year-long public inquiry into the scheme which involved it handing in a dossier of 15,000 pages.

While it has been a bonanza for lawyers, PR advisers and the like, it has been a nightmare not only for ABP but also for those members of the public who fear the impact of this scheme on a important habitat for wildlife and no doubt on some house prices.

Would it have taken so long to resolve the issue elsewhere, even in countries where environmental issues rate more highly than here? Surely not.

The government has promised to shake-up the planning process to prevent delays over whether to expand everything from airports to wind farms. It should also stop any repeat of ABP's agonising wait on Dibden Bay - though surely new container capacity should be built on brownfield sites such as that proposed by P&O on the Thames estuary rather than on top of a beauty spot.