Bank policymakers of UK are concerned about the expected high inflation levels and the consequences the industry will face. It is feared that the inflation will increase over the period. Bank of England is struggling with the rising price pressures and slow growth rates and the soaring inflation expectations will also affect the interest rates as it will come down more slowly than expected. Bank of England in its February survey stated that the public expect the inflation to be around 3.3 percent in the coming year and also the current inflation levels have jumped to a record level of 3.9 percent.

Bank of England setters have also warned that the impending inflation originated by the rising and falling cost of worldwide commodities will worsen the situation further and the actual threat to UK’s economy will be further price hikes and more expectations of the public which may lead to higher inflation levels.

BoE has reserved the rates at 5.25 percent during the first week of this month however shareholders are making a bet that the rates will fall as low as 4.5 percent within this year. This kind of predictions also makes the position of the Monetary Policy Committee more difficult as this dampens the interest rate cut in the near-term. It is believed that the workers may demand higher wages to meet the rising prices of commodities and the industry will be forced to increase the wages to retain them.

Many economists feel that the consumer’s inflation expectations are overly influenced by the increased price of essential commodities such as petrol and bread. According to the economists, because of the latest price hikes and the increased rates of food price the public tend to expect the inflation to grow at a higher rate and the fact that this piece of information is widely exposed further supplements the belief.

The CPI inflation as per the last reading was 2.2 percent in January. The retail price index which also comprises of mortgage payments was 4.1 percent during this period and the news has created much concern for BoE as the high inflation expectations will reduce the chances of quick cut in interest rates. Since December, Bank of England has undertaken two quarter-point cuts and has kept the standard rate at 5.25 percent. So, for the moment the economists feel that the Bank’s apprehension about inflation has balanced its growth fears.

The prime factors that affected the CPI had also affected the RPI and the mortgage interest payments had a downhill effect on the RPI during this month. Also, the RPIX inflation on all the items excluding mortgage interest payments had risen to 3.4 percent in January from the 3.1 percent mark in December. Moreover, the largest growing pressure on RPI is due to the raise in the price of fuels. With oil prices at 110 dollars, the inflation rate may further rise to record prices and economists are also voicing their fears to the Government.

For those who have not come across leveraged buy-outs before, these were very very popular in the 1980s, at a time when stock markets were flying high and takeovers and mergers were all the rage.  Money was also cheap, and lenders were bending over backwards to help corporate raiders with worldwide economies booming.  So how do leveraged buy-outs work?

As the name suggests, raiders who used the leveraged buy-out ideals would take out massive loans against a target companies assets and cash flow projections, paying off the debt as they went along.  While obviously this would have an impact upon short term profitability, with the majority of income going towards paying off what was in many cases millions of dollars worth of debt, there were advantages.  The beauty of these schemes was that for a relatively small initial sum, the raider could borrow many more times that amount using the company’s assets as collateral and maybe even selling off non-core assets.

After the pay back period was over, and the loan had been successfully repaid the corporate raider would have a business which they owned lock stock and barrel, for which they may only have paid a fraction of the value - with the vast loans paid back out of the companies cash flow.  If the theory went perfectly to plan, which it often did, the owner of the business could net hundreds of millions of dollars of assets.

So what went wrong?

As the market was pushing along well, the economy flying high and not a cloud in the sky, up popped the 1987 stock market crash.  Not only were the banks now looking to reign in some of their ill advised loans, interest rates were sneaking higher (adding to the debt burden) and the economy came under pressure (reducing profitability and cash flow).  These were the events which killed the leveraged buy-out market overnight.

While highly successful for many investors in the 1980s, the situation has never been quite the same with leveraged buy-outs.  We have some debt funded buy-outs since then but the banks are more risk averse and there are fewer prime candidates available for leveraged buy-outs.  Are the golden days gone for ever? Who knows……

While it has very much been in the news of late, the Bank of England has a history which is drenched in traditional and authority.  Located at the famous Threadneedle Street, London  the bank was founded by a Scotsman by the name of William Patterson as long ago as 1694.  In order to begin trading, Patterson arranged  a loan of some £1.2 million to the UK government, in exchange for the right to operate as the bank of the UK government - something which was set down via a Royal Charter in July 1694.

While the Royal Charter has been renewed and amended on a number of occasions since 1694, the Bank of England remains very much the mouth piece of the UK government in the financial markets.  Back in the early days when there was little regulation and no defined structure to government finances, the Bank of England took advantage of this and while entrenched in public and national debt services, they also took the first steps towards regulating the banking sector as a whole.

The first governor of the bank was Sir John Houblon, whose face still adorns the £50 note issued in 1990.  There have been numerous governors since then with one of the most recent being Eddie George, who was subsequently replaced by Mervyn King on his retirement.  While the bank were recently given a form of independence and the right to act on their own instructions, there is still a direct connection between the Bank of England and the UK government, something which has caused some controversy.

The recent Northern Rock debacle has opened up a number of old wounds, and we are yet again going through a phase of reviewing the regulations and rules relating to the financial markets.  Despite many attempts to undermine her, the “Old Lady of Threadneedle Street” (as the bank is fondly referred to) is still very much alive and kicking, with a reputation that many overseas authorities can only dream of.