The inflation forecasts we report this week make worrying reading for Mervyn King and his fellow members of the monetary policy committee (MPC), the group that sets interest rates.

As governor of the Bank of England, King has already had to write to the chancellor once this year to explain why inflation is running ahead of the government’s target of 2%. It now looks likely to inch past 4% when official figures are released this week and could, according to City forecasters, go as high as 5% by the end of the year. King may have to get his pen out again fairly soon.

While writing the letters may be irksome, a reminder of just how impotent a central-bank governor can be in the face of unexpected global events like the credit crunch and the boom in commodity prices, they may not be as worrying to King as the ticklish job he faces at the MPC. The committee’s job is to set interest rates so as to keep inflation at or near the government target. On the face of it, prices are racing up, suggesting the MPC should slam on the brakes by jacking up interest rates.

Suggest this course of action to a business person — particularly a retailer or housebuilder — and they will probably faint. Consumer confidence is already down, as the collapse in the housing market and wipeout in the retail sector proves. A hike in interest rates would make the situation worse, not better.

What King must hope for is to ride out the storm. The MPC’s goal should not be for a rapid realignment of inflation with the government’s target, but a steady readjustment over a year or more, a policy he outlined in his letter to the chancellor earlier this year.

In the meantime, don’t be surprised if the Bank’s official pronoucements on the economy in coming weeks are gloomy. What King and Co really want to avoid is the inflation felt by consumers being transferred into aggressive wage demands that launch the economy into an inflation spiral. If people think the economy really is in trouble, they are less likely to ask for higher wages.

The hardest word

THERE is something deeply unconvincing about the heads of Britain’s biggest banks apologising for their abysmal results. Sir Fred Goodwin, chief executive of Royal Bank of Scotland (RBS), was the latest, saying on Friday he and his colleagues “regret very much” reporting the bank’s first loss in 40 years.

I don’t question the bank chiefs’ sincerity — who wouldn’t be sorry to have messed up so publicly? — but rather the apology’s relevance.

Shareholders really aren’t interested in managers saying sorry after the event. What they want to know is what is being done to restore the bank to health, whether the people doing it are up to the task and, if they are not, who will replace them and when.

In the case of RBS, as we reported earlier this year, the answer to the last question is that Goodwin is safe for the time being, but Sir Tom McKillop, the chairman, will probably have to step down early as part of a rejig of the board. That doesn’t mean Goodwin is off the hook — saying sorry won’t save him as far as the City is concerned.

The execs at the top of RBS and the other big banks will know this, in particular Goodwin, who has a reputation as a tough boss and ruthless eliminator of management dead wood.

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