Erikka Askeland: King struggles with greasy pig that is rising inflation

MERVYN King, head of the Bank of England, is damned if he does and damned if he doesn't raise interest rates. He admitted as much in his letter to Chancellor George Osborne - the tenth he's had to write as inflation continues to squirm greased pig-like from his grasp.

In deciding to keep rates for yet another month at 0.5 per cent, the central bank governor wrote that he "did not wish to conceal that there are real differences of view" among members of the monetary policy committee (MPC) on which way rates should go. Put them up and the private sector will squeal and falter, while a rates rise runs the risk of boosting the value of sterling just at the time when a meek pound is the only thing keeping exports healthy.

But leave them be for too long and the cost of everything shoots up, making a mockery of pensions, fixed incomes, and the paltry so called "pay rises" most workers in the private sector got last year.

But while the slippery inflation target has continued to elude King's grasp, his rabbit-frozen-in-the-headlights approach to monetary policy smacks of a deeper problem - that there is little the MPC can do in the current economic environment to either control inflation or the cost of lending.

A rise in rates acts to stamp on inflation by making the cost of borrowing dearer - thus people, companies, governments borrow less, spend less and this in turn reduces pressure on prices.

But yesterday's January consumer inflation figure of 4 per cent was largely driven by tax increases and the cost of food and oil - with there being little the BoE can do about these. And while a responding rates rise might have buoyed the spirits of a handful of savers, the difference between the bank rate and the cost of lending is currently so unrelated as to be laughable.

The risk staring starkly at the MPC is that the cost of lending will rise with or without a rates tweak. The safety flotation devices provided to banks by the government - through the special liquidity scheme and credit guarantee scheme - are set to run out of air in 2012, forcing banks to brave the harsh currents of the money markets, which are no longer frozen but are still bloody cold, and as a result, expensive.

So the lever of interest rates rises on lending is already out of King's hands. Banks themselves being forced by the market to up the costs of mortgages, for example, will have the effect of kicking the bottom rungs from the housing ladder, where the poorest are already clinging by finger tips further weakened by that pesky inflation. Lending to businesses will also get more expensive, no matter how keen the banks are to write their names large on the coalition's Project Merlin 190 billion for business lending.But there is one thing the BoE can do with its policy tool box and that is using a rates rise specifically to boost the value of sterling. Yesterday, as the markets parsed King's gnomic comments on how his bet on inflation is only about 50/50, sterling rose on the back of the expectation of a rates rise sooner rather than later. A boosted sterling would certainly increase buying power in the short term - making food, wine and petrol slightly cheaper. But it would also dangerously undermine the UK's only ticket to recovery, exports.

The trouble with the governor of the Bank of England being damned either way he chooses is so are we all.

Plus a change despite the best efforts of Merlin

PROJECT Merlin is a triumph: This according to the Treasury which hailed the start of the bank bonus reporting season - for that is what most are paying attention to now - with the claim that "bonuses are down, and are lower as a result of Merlin". Sadly for the Treasury and the banks, which have worked hard to make it look like they are listening, no-one is buying it.

So, yes, it appears bonuses at Barclays are down 12 per cent but then overall pay to staff increased 20 per cent to 11.9bn. At BarCap, where the high rollers roll, staff pay rose even more, jumping 44 per cent. Let alone the fact the bank's own estimates of its bonuses are complicated by figures adjusted for the sale of Barclays Global Investors (BGI) in 2009.

For most, a bank with a 2.6bn bonus pool to splash about in still makes it look as if nothing has changed.