FTSE pushes past 5,000 as pound drops
Thursday 07 August 1997
The index ended up 65.6 points at 5,026.2, just shy of the 5,027.7 high reached at one point during the day. The picture was different on the foreign exchanges, however, where the pound lost 5 pfennigs to end at just above DM3, and its index against a range of currencies fell by 1.8 to 103.9. It also lost ground against a generally strong dollar, which touched its highest levels for eight years.
The most popular explanation for the weakness in sterling, taking it back to its end-July level, was that fears the Bank of England's Monetary Policy Committee would raise interest rates today were receding. However, most analysts said they still expected a quarter-point increase, taking the cost of borrowing to 7 per cent.
Despite complaints from many companies about the damage the strong exchange rate was inflicting on their business, a series of reports of healthy profits helped explain the upbeat mood in the stock market.
David McBain, an equity strategist at NatWest, said: "The strongest sectors are not particularly vulnerable to the strong pound." Banks, pharmaceuticals and oil, none of them much exposed to continental markets, had been performing especially well, he said.
There was some relief for the hardest-hit exporters yesterday thanks to the weaker pound. But many analysts doubted that this reflected a genuine change in prospects for interest rates.
Richard Iley at ABN Amro said: "People are saying that expectations of an increase in interest rates have died down, but we still think they will rise.
"If they do not, it would disappoint the currency market and we could see the pound falling back to DM2.95."
Michael Lewis at Deutsche Morgan Grenfell agreed: "There will probably be a rate rise. The fact that the pound has fallen a little actually means the Monetary Policy Committee can feel more comfortable about raising rates this week."
However, Jonathan Loynes at HSBC Markets thought the committee's decision was more finely balanced. "It is a close call this month, and if they do move it will be the last rise for a while," he said.
Economists will be scrutinising next week's quarterly Inflation Report from the Bank, its first since being granted independence by Gordon Brown, for signs about how much further it thinks interest rates will have to rise. Most think the level of interest rates will reach a peak of around 7.5 per cent in the early part of next year.
There were fresh warnings yesterday about the danger of overkill. Consultancy Cambridge Econometrics said the strong pound would hit manufacturing hard in some regions, with a risk of recession by 1999.
It predicted the electronics industry in Scotland and the South-east outside London, along with manufacturing generally in Wales and the West Midlands, would be most affected.
Separately, the Credit Card Research Group warned that recent buoyant consumer credit figures should be interpreted with care because a quarter of the gross monthly increase was typically repaid straight away. Net credit card lending figures, a better indicator of growth in borrowing, have been volatile month to month, and have not displayed the same strong upward trend as the headline figure.
Despite yesterday's new record for share prices, most analysts were cautious about how much further the stock market could climb. Investment bank Merrill Lynch predicted the FTSE's peak would probably be around 5,100.
The FTSE 100 index has added nearly 1,000 points in a 22 per cent rise since the start of 1997. Its level has more than doubled since the economic recovery began in 1992 and five-fold since the index began at the beginning of 1984.
But in a new assessment of the Labour Government's first hundred days published today, economists at Nikko Europe point out that the index has underperformed the US and German stock markets since the election.
Comment, page 17
Market report, page 18
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