Fresh signals boost interest rate hopes
Tuesday 09 September 1997
The latest batch of evidence confirmed the financial markets in the view that the Bank of England will see no need to increase interest rates again for some months, if at all. The pound fell to its lowest level since early June as a result, bringing further relief to exporters.
Although sterling's exchange rate is still 17 per cent higher than a year ago, it has now declined 6 per cent from its midsummer peak. This drop reflects a decisive shift of mood in the markets.
The Bank of England's Monetary Policy Committee is not expected to announce any change in rates on Thursday, at the end of its two day meeting. Many City economists reckon that rates, at 7 per cent, have reached their peak.
However, some warned yesterday that the possibility of higher interest rates in the coming months could not be ruled out. David Walton at the investment bank Goldman Sachs said: "We have had a reasonable period of steady growth and low inflation, but higher inflation can appear out of nowhere. It is only with hindsight that most people recognise the warning signals in fast monetary growth and a tight jobs market."
He said the economy would need to slow further to avoid inflationary pressures.
Official figures yesterday showed that manufacturing output has grown more than expected so far this year. It increased by 0.4 per cent in July to a level 1.6 per cent higher than a year earlier.
Earlier estimates for the level of output were revised up. The Office for National Statistics said the trend growth rate was around 2 per cent, up from the previous figure of 1 per cent.
Much of July's increase in manufacturing production was accounted for by a rebound in engineering, despite its heavy bias towards exports, and textiles. Total industrial production was boosted even more by strong oil and energy production. It climbed 0.6 per cent in July, with its annual growth at 2.3 per cent.
"Manufacturing is not particularly weak. The strength of home demand is still outweighing the weakness of exports," said Adam Cole, an economist at James Capel.
Separate figures showed inflation at the factory gate is virtually non- existent. Prices charged by manufacturers climbed 0.1 per cent last month, and were 1.4 per cent higher than a year early.
The closely watched "core" factory gate inflation measure edged up from 0.6 per cent to 0.7 per cent, but is still barely above the 30 year low of 0.5 per cent it reached last spring.
Prices paid by manufacturers for materials rose 0.4 per cent in August. They remained 7.8 per cent lower than a year earlier.
The third reassuring piece of evidence yesterday was a survey from the British Retail Consortium claiming that growth in the value of high street sales had slowed to its lowest for five months as a result of the recent mortgage rate increases.
Annual growth in "like-for-like" sales, adjusted to take out the effect of increased floor space, slowed to 3.9 per cent from 5.2 per cent in July. Total sales growth slipped to 7.6 per cent from 8.5 per cent.
The BRC - whose survey does not track official retail sales figures from month to month - warned that holiday spending abroad in August might have dampened UK sales. But Andrew Higginson, chairman of its economics committee, said: "This month's weaker growth in sales supports what we have been saying all along - that there is no runaway boom on the high street."
The CBI's survey of retailing, published last week, also showed an August slowdown. The two surveys have helped calm fears about a consumer boom.
The pound ended at just over DM2.86 yesterday, while its index against a range of currencies fell 0.1 to 100.1.
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