View from City Road: Same old tune from Eddie

Eddie George, Governor of the Bank of England, returned to a familiar and favourite theme yesterday at the Euromoney International Bond Congress - how unfair it is that the Government should have to pay so much for its borrowings, circa 7 per cent in real terms on long term money. You know the sort of thing; we are now in a permanently low inflation environment and gilt yields should reflect that . . . blah, blah . . . why won't the markets trust us . . . blah, blah . . . bond yields are completely out of sync with reality . . . blah, blah, blah.

Only this time Mr George came armed with a lengthy checklist of reasons why everyone has got it so wrong about future inflation. In themselves, he argued, high real interest rates act as a powerful brake on international economic expansion. High unemployment, in Europe at least, helps to keep wage settlements low. Increased international competition means there is more pressure on firms to keep prices low.

Last, but far from least in Mr George's eyes, there is a new resolve in Britain and elsewhere never to let the inflation monster loose again. Mr George confessed that events in world bond markets were perhaps the most perplexing and difficult to fathom.

While he acknowledged that buyers of bonds might be allowed a degree of cynicism about promises from central bankers, he also insisted it would be a mistake to underestimate the Bank's commitment to price stability.

And so it goes on. It is all very well to complain about 9 per cent yields and the like. What can Mr George do about it? If the view is that gilts are now so much a part of the global bond market that it doesn't really matter what is happening in Britain any longer, then perhaps there is nothing he can do, other than urge the case for reimposing exchange controls . . . Or perhaps he will just have to wait the two or three years it might take to establish the new Bank of England brand image in the marketplace.

Traders know perfectly well that their economists are forecasting only moderate increases in inflation over the next few years. Even so, they are not going to believe things have changed definitively until they see it working through the economic recovery and the next general election.

So if he really believes the message, perhaps Mr George's only option is to put his money where his mouth is. Forget all these high yielding stocks, what about another index-linked issue?

International investors hate them, but then international investors are not buying gilts at any price right now. As always, however, the simplest solution is also the most obvious. Stop borrowing.