City confident of base rate standstill
Tuesday 05 September 1995
The financial markets stuck to their view that there would be no change in base rates when the Chancellor and Governor of the Bank of England meet on Thursday, despite the mortgage rate reductions announced by Halifax building society yesterday and Abbey National and the Northern Rock last Friday.
"The prospect of a base rate cut this week is pretty remote," David Miles, an economist at investment bank Merrill Lynch, said. But most City analysts expect Eddie George, Governor of the Bank of England, to back down from his earlier advice to Kenneth Clarke, the Chancellor, to raise base rates to keep inflation on target.
Simon Briscoe at Nikko Europe said: "The Bank will change its stance this week but it is hard to see any reason base rates should come down this week. Abbey National and Halifax have already done the work of cutting borrowing costs."
Traders in the financial futures markets still expect lower base rates by the end of December. But caution about this week's decision was supported yesterday by a clear inflation warning from the Engineering Employers' Federation and the latest in a run of strong money supply figures.
The EEF's latest monthly survey of pay trends in the industry, published today, shows that almost one in five settlements in the three months to July was above 4 per cent, and more than half were above 3 per cent. Graham Mackenzie, director general, said: "Rising pay settlements throughout the economy pose an inflationary threat."
Separate figures yesterday showed that the growth of the narrowest measure of the money supply, M0, picked up last month, making it the latest monetary indicator to show signs of strength. The 12-month growth in M0 climbed to 6.1 per cent in August. It has been above its 0-4 per cent "monitoring range" for two years.
Today's engineering survey, covering 243 pay settlements, reports that 47 were above 4 per cent and 14 exceeded 5 per cent. The average award was 3.49 per cent - almost exactly the same as retail price inflation in July.
Many of the EEF's members supply the car manufacturers and have been influenced by forthcoming pay increases worth more than 4 per cent at companies such as Rover, Nissan and Jaguar.
The survey follows a report yesterday from Industrial Relations Services that settlements generally had started to show signs of rising after staying flat for seven months.
It found that three-quarters of private sector pay deals were worth 3 per cent or more. The Chancellor and Governor of the Bank of England watch pay surveys closely in their monthly inflation assessment.
The rise in narrow money growth last month was due to a jump in bank deposits at the Bank of England. The growth in M0's most significant component, cash in circulation, edged down to 5.9 per cent.
The latest narrow money figures follow evidence of buoyant growth in consumer credit and the broad money measure, M4, in July. During the past year M0 growth has picked up as the value of high street spending has dropped.
Spending on items not included in retail sales, such as lottery tickets and leisure, probably explains this divergence, and the buoyancy of notes and coin in circulation with the public points to reasonably robust consumer spending. However, most economists downplayed yesterday's figures.
Comment, page 17
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