Money growth raises hopes on spending: Analysts say inflation indicator in 'safe' zone

BUOYANT growth in the amount of money circulating in the economy yesterday raised hopes that high street spending was strong last month despite growing awareness of the tax increases that begin to bite this week.

The value of cash in circulation rose 0.9 per cent last month, taking the annual rate of increase from 5.6 to 6.1 per cent, according to the Bank of England. Annual growth in the narrow money supply measure M0 - which also includes banks' balances at the Bank - rose from 5.5 to 5.8 per cent.

City economists argue that M0 is a good indicator of consumer spending, while the Bank of England has argued that it is also an effective guide to inflationary trends. M0 is growing well above its 0-4 per cent 'monitoring range', but savers have been encouraged to hold cash by the low interest rates offered by bank and building society accounts.

Michael Saunders, of Salomon Brothers, argued that a range of 2.5 to 6.5 per cent was justified by the current level of base rates, suggesting M0 was 'not yet giving an alarm signal'. But John Marsland, of UBS, said 'strong M0 growth is a leading indicator of the timely rekindling of inflation next year'.

The figures had little impact on the financial markets, where a strong performance by London share prices was curtailed by volatile trading on Wall Street. The FT-SE 100 closed 15.3 points better at 3,131.5 after being up 30 earlier.

Share prices were helped by a good day for the pound, which rose half a point to 79.8 per cent of its 1985 value against a basket of currencies, but was little changed against the dollar or the mark. The Treasury also announced that Britain's reserves of gold and foreign currency fell by an underlying dollars 45m to dollars 43.5bn last month.

Gilts performed well in the morning but lost steam. Other bond markets were helped by the 0.03 percentage point cut in the key German 'repo' rate.