Cut in interest rates still on line

Economy: Promising signs of housing market revival and pick-up in consumer spending unlikely to change timetable, say analysts
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The Independent Online

Economics Correspondent

Fresh signs of recovery in the housing market and evidence of a pick- up in consumer spending are unlikely to derail a cut in interest rates later this week, analysts said yesterday. A surge in the growth of the narrow money measure M0 in February suggested that spending might have increased after a quiet start to the year.

Last month saw a big increase in narrow money - mainly cash in circulation - according to Bank of England figures. The higher-than-expected 1 per cent jump took M0's annual rate of growth to 6.1 per cent from 5.2 per cent in January.

The annual growth of cash in circulation climbed to 6.4 per cent, the fastest since the end of 1994, following a 0.9 per cent jump during the month.

Although the narrow money supply tends to be erratic from month to month - as the Treasury pointed out yesterday - the increase in its pace of growth could signal increased spending. "The evidence of liquidity sloshing around the system does not square with the notion that the economy is on its uppers," said Kevin Darlington, an economist at brokers Hoare Govett.

David Owen, at Kleinwort Benson, said: "The figures do confirm that the economy was stronger in February." A CBI survey of the distributive trades due on Thursday will give a clearer indication of high street spending last month.

Mr Owen said maturing Tessas might already be playing a part in boosting spending. About pounds 20bn-worth mature this year, plus around pounds 6bn in interest, heavily skewed towards the first quarter. According to recent figures, retail deposits with banks and building societies fell by more than pounds 2bn in January, mainly due to Tessa withdrawals.

City analysts do not expect the buoyant money figures to stand in the way of the widely anticipated quarter-point reduction in base rates to 6 per cent. M0 has been growing faster than its 0-4 per cent monitoring range for more than three years without arousing alarm. Factors such as low interest rates, meaning there is little lost interest cost to holding cash, Lottery mania and higher numbers of tourists have been taken as explanations for rapid growth in the use of cash.

Other recent figures have shown that manufacturing industry is stagnating and inflation declining. Most forecasts of the economy point to further falls in the Government's target measure of inflation.

"The money supply is just one piece of the jigsaw. It will not make any difference to what the Chancellor decides on Thursday," said Ian Shepherdson at HSBC Markets.

However, Simon Briscoe, an economist at Nikko Europe, said: "Signs of consumer strength will lead to talk that this week's rate cut will be the last for some months."

Chancellor Kenneth Clarke and Eddie George, Governor of the Bank of England, hold their monthly meeting on Thursday afternoon. The Bank is expected to introduce the lower rate either late on Thursday or on Friday morning.