Handbags at dawn at Bank of England

By This Is Money
Updated: 04:16 EDT, 8 February 2011

This is not the easiest time to be a central banker. A combination of surging food and energy prices and slower-than-expected growth in the Western economies has raised the spectre of 'stagflation' last seen in the 1970s and 1980s.

As a result Mervyn King at the Bank of England and his counterparts in Frankfurt and Washington are having a rougher ride than they are used to.

Indeed, the New York Times thought the issue important enough to run a lengthy tale on King's problems at the weekend.

But the premise on which the article is based looks to be false.

Stagflation, as it existed in the past, occurred at a time when price rises were running in high double digits, requiring interest rates at the same kind of level to combat inflation. That naturally produced sluggish output.

That is not the case at the moment.

So far inflation is the product of outsized demand from China and Asia, which is raising commodity prices. Even the most pessimistic forecasters of UK consumer price inflation do not see it rising above 5%.

And with jobs in such short supply there is no real reason to believe that the second round effects, in the shape of shocking pay deals, will take place.

As for growth, how miserable should we really be? Last year, although it was quickly forgotten in the misery of the snow affected final quarter, output rose 1.7% in the UK, so there was in fact no stagnation.

The first surveys of 2011 from the purchasing managers, the CBI and today the British Retail Consortium verge on the optimistic.

The other major criticism of King, made publicly by Monetary Policy Committee member Adam Posen, is that he has blurred the independence of the Bank by being so strident on the need to cut the deficit.

But as Posen will know, central bankers, including US incumbent Ben Bernanke, have always felt free to pronounce on budget policy.

The bigger question is whether King has become too close to the Tories as critics allege.

It is true that George Osborne's Treasury is more at ease with an independent minded governor - who says what he thinks - than the Gordon Brown-Alistair Darling tag team which on occasion found King's lecturing quite hard to take.

But the governor is not out to win any popularity contests.

Nevertheless, his very robust thinking on banking reforms would find favour with much of the British public. The Grey Lady's attack on the Old Lady looks mischievous.

Last Czar

It must be catching. Hard on the heels of the secretive New York-based activist investor Edward Bramson elbowing his way onto the board of F&C, along comes Isle-of-Man based Laxey Partners, which is seeking to improve the performance of Alliance Trust.

Alliance, an investment trust tracing its history back to 1888, is run from Dundee by Katherine Garrett-Cox who has enjoyed the sobriquet 'Katherine the Great'.

She must now hope she won't become known as the last Czar.

Laxey is very different to Bramson and his vehicle Sherborne. There is none of the hermit-like secrecy and its partners - led by Colin Kingsworth - are much more open to a public dialogue.

In the case of Alliance the objective is to narrow the stock market discount of Alliance shares to net asset value.

At present it stands at around 15% and Laxey would like to enforce a rule that encourages Cox to buy back Alliance shares when the discount widens beyond 10%.

This is fine in principle but setting fixed rules for the way an investment fund behaves is difficult.

What if, for instance, the buyback is required at a moment when Alliance does not have the cash or prefers not to increase gearing for prudential reasons? These are difficult questions.

Laxey will need to answer them if it wants to enjoy the success it had at British Land back in 2002.

Bubble bath

How ironic that AOL is accused of paying bubble prices after buying 'The Huffington Post' blog for £197m.

It was after all the disastrous merger of AOL and Time Warner in 2001 for $164bn which was seen as the bit of madness which brought an end to the last tech-bubble.

This time the sums are much smaller and AOL, a company without a role, is seeking to re-establish itself as a content provider. Huffington may help fill the gap.

AOL already has recruited 900 reporters across the US as it builds local news clusters - but it is going to be a hard slog.