The pound remained close to the nine-year high it touched earlier in the week, even though new economic figures yesterday added weight to the growing evidence that the economy is slowing down. The sterling index ended at 107.3, down just 0.2.
The debate about whether higher interest rates were needed or justified, in the light of the strong pound, raged again yesterday.
Willem Buiter, one of the more hawkish members of the Bank of England's Monetary Policy Committee, said the tight jobs market still posed a risk to meeting the inflation target. "Earnings growth is key," he said.
He supported the claim by Gordon Brown, the Chancellor of the Exchequer, that the Government's fiscal policy was tight enough after the Budget, saying it had made a "significant contribution" to dampening the economy. Professor Buiter said he favoured an early interest rate rise, rather than the "wait and see" approach. "By postponing, in a situation where it seems likely that a rate increase of some kind is necessary, you do get upward pressure on sterling in anticipation," he said.
The Chancellor repeated his warning that the outlook for the economy depends on wage settlements. He said he sympathised with manufacturers about the high exchange rate but added: "At the same time they have to watch their wage rises. Manufacturing wage rises have been higher than in other parts of the economy."
The Engineering Employers' Federation, however, reported a slight downturn in pay deals, from 3.5 per cent to 3.4 per cent in the latest three months. The EEF said this vindicated its call for no further interest rate increases.
The Office for National Statistics pointed out that the duty increases in the Budgets in July and earlier this week would themselves increase the measured inflation rate. It estimated the net effect would be to add about a quarter of a percentage point to the inflation rate by January 1999, although the timing would depend on how quickly retailers passed on the higher duties to consumers.
Other statistics yesterday showed the growth in the broad money measure, M4, slowing into single digits for the first time since the end of 1996. Its annual growth rate was 9.7 per cent in February.
Separately, the high street banks and building societies reported weaker figures for mortgage lending in February.
Adrian Coles, director general of the Building Societies Association, said: "The traditional spring pick-up has come early to the housing market." The recovery was modest and sustainable, he said.
But adding to together the bank and building society lending showed new advances amounting to pounds 1.5bn, around the same as January's figure.
Builders' rate fear, page 28Reuse content