Jeremy Warner's Outlook: A cloudless sky as Blair heads for the polls

Mervyn King's ambition is to make monetary policy boring. He seems to be succeeding beyond his wildest dreams.

Mervyn King's ambition is to make monetary policy boring. He seems to be succeeding beyond his wildest dreams. Michael Howard's election strategists will find nothing in the way of ammunition with which to attack Labour in yesterday's Inflation Report from the Bank of England as they pore over the detail for signs of economic mishap to come. To the contrary, from an economic perspective things could hardly look better for the incumbent Government, which despite its very best endeavours to cause upset, sails effortlessly on the winds of economic prosperity towards another landslide victory at the polls.

The outlook, Mr King says, is for "continuing steady growth with low inflation". He's said this many times before, and it would, of course, be somewhat alarming if he said anything else, but it is a measure of the macro-economic stability Britain has achieved since the Bank of England was given independent control of monetary policy that everyone now believes him.

The contrast with Germany, Italy and Japan, all of which are again teetering on the brink of recession - or even the debt-infested US economy, the future course of which few are prepared to predict with any degree of confidence - could scarcely be greater. Even yesterday's little missive from the European Commission, saying that Britain is likely to breach the Maastricht rules on the size of the budget deficit, is scarcely anything to worry about. In the same breath, the EC adds that the UK appears to be in a relatively favourable position as far as the long-term sustainability of the public finances is concerned.

For anoraks of UK monetary policy there are perhaps one or two wispy clouds to be spotted in the latest Inflation Report on the distant horizon. The central projections for both growth and inflation are a little higher than they were last November, with the latter rising above the 2 per cent target level two years hence. Yet conveniently the Monetary Policy Committee judges that the balance of risk is on the downside, so no need for an interest rate rise just yet. MPCologists will take note of the Governor's observation that there is a range of views among Committee members on this, and it is indeed faintly odd that the forecasts should say one thing but the MPC should take the opposite view.

The reason, Mr King says, lies largely in the possibility that consumption growth might slow markedly from here on in. The forecast assumes it will continue at the average rate achieved over the past three years, but the evidence from retail sales figures for Christmas and what's been happening since is that it is already slowing. Then there's the strong likelihood that taxes will rise after the next election to pay for the Government's spending commitments. Unsurprisingly, the Governor wasn't commenting on that, but it's bound to be a concern in trying to figure out what might happen to consumption. For the record, the Bank of England uses only the assumptions and projections already published by the Treasury for taxation as a share of GDP in making its forecasts.

Yet all in all, these are niggling little anxieties in what seems to be a sea of economic calm. Mr King is not even that bothered about the slight uptick in wage inflation announced yesterday. The old link between low unemployment and high earnings growth seems to have been broken in recent years.

What could happen to interrupt this economic nirvana? In the short term there are few obvious threats. However, in his press conference yesterday, Mr King alluded to what has long seemed to me the most potent danger to Britain's economic renaissance - that it will just run out of steam. One of the big factors behind British economic growth in the eight years Labour has been in power is the improvement in the so-called terms of trade. An appreciating currency has allowed Britons to rely on the increasingly cheap price of imported goods to keep inflation low while simultaneously achieving good levels of growth in high value added services sectors - particularly financial and business services.

We may already have had the best of that dynamic, for it seems unlikely sterling will appreciate any further than it already has. Much more likely is that it will fall, causing the price of imported goods to start inflating again. This might eventually reverse the happy coincidence of economic circumstance Britain currently enjoys. Yet to use Bank of England speak, the balance of risk still seems against any such outcome. As Mr King says, the outlook is for steady growth with low inflation.

MG Rover's nemesis

What better confirmation of this benign state of affairs than BMW's much trailed announcement yesterday of more than £100m of new investment at Cowley, Oxford, to boost production of the Mini. Designed by Germans with a very high proportion of German components, built by Britons, and driven by, well, almost every country in the world now, the BMW mini has become an outstanding example of European, cross-border, manufacturing success. In terms of Britain's lamentable record as a car manufacturer - the indigenously born bit of it, that is - it is also a triumph of hope over experience.

It was probably the best deal that Dick Evans, the former chairman of British Aerospace, ever did when he managed to offload Rover to BMW for the princely sum of £800m in the mid-1990s. BMW subsequently invested £2.5bn in the business, but it didn't do any good. The English patient, as BMW executives mournfully called their new charge, very nearly dragged the German parent company down with it. In the end, BMW had to pay John Towers and his Phoenix consortium to take the business off its hands, but in the process it did manage to keep the best bit, and with a new design and heavy investment, the Mini has since thrived.

The same cannot be said of the discarded torso at Longbridge, which still close to death has yet to emerge from intensive care. Today the company sells so few cars that you wonder how Mr Towers manages to keep the production lines open at all. His only hope of continuing to do so, and it is a slender one, is the intended deal with Shanghai Automotive Industry Corporation, which is meant to be providing the funds for the joint development of a new range of cars that will be manufactured in Britain and China.

Somewhat predictably this has so far proved a one-way street. The Chinese are already lapping up Rover's know-how but Rover has yet to see anything in return. Is this to be another Chinese takeaway, or can Gordon Brown return from his whistle-stop tour of China next week with a signed contract and a suitcase full of renminbi. Now why does it seem so unlikely that Shanghai Automotive is going to prove as generous with its money as BMW?

LSE's national issue

Competition lawyers expressed almost universal surprise at the Office of Fair Trading's decision yesterday not to refer competing bids for the London Stock Exchange to Brussels for examination. Sir John Vickers, the OFT's chairman, instead seems intent on having them investigated by Britain's own Competition Commission.

Why this should cause such consternation is a bit of an oddity, for even though the logic of modern competition policy dictated that the affair should go to Brussels, the realpolitik meant Britain was always going to keep it as one of its own. The European dimension in this takeover battle is neither here nor there. This is Britain's national stock exchange which is being fought over, and notwithstanding the fact that national sensitivities are not meant to have any bearing on the matter, the reality is that they were always bound to.

Again, once before the Competition Commission, only competition issues are meant to influence the outcome. Yet how else are the FSA and the users going to have their say on accountability, corporate governance and the listing requirements other than through the Commission's investigation? In theory, the FSA could block the deal on its own account, but the politics of disallowing our European partners from bidding on nationalistic grounds make that highly unlikely. Instead the Competition Commission will find a way of taking these concerns into account.

jeremy.warner@independent.co.uk