Sterling soars on renewed confidence

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Sterling reaped the rewards of the UK's renewed economic confidence yesterday, soaring to its highest level against the euro this year.

The pound reached €1.1758 in early afternoon trading – having dropped down near to parity in December – after figures from the National Institute of Economic and Social Research showed the worst of the recession may be over.

The tentative optimism was confirmed by the Council of Mortgage Lenders yesterday reporting a 16 per cent rise in home loans in April compared to March. But the signs are not unambiguously positive. Despite the month-on-month improvement, April's 35,600 approvals was still 28 per cent lower than the same month in 2008 and 60 per cent down compared with the seven-year average. The value, at £4.5bn, was 40 per cent down.

Homeowners are paying the price for the 20 per cent fall in the value of property. The Bank of England estimated yesterday that as many as 11 per cent of UK mortgage-holders were in negative equity this spring, albeit only mildly.

There are similarly ambivalent figures from the battered construction sector. The three months to April saw orders drop by 9 per cent from the previous quarter, and by 38 per cent compared with 2008, according to the Office of National Statistics. Private housing orders were down by 42 per cent.

But despite the grim figures, the situation is better than it was. Builders saw orders worth £2.7bn in April, the third consecutive month of growth. And the construction sector's purchasing managers' survey for May, published this week, also pointed to a slowing rate of contraction as the total activity index lifted to a 12-month high.

The Bank of England's quarterly bulletin is also not resolutely pessimistic. Although homeowners are still suffering, the credit crunch battering the wider economy could be easing.

Spencer Dale, the chief economist, said: "Market contacts reported the prices of riskier assets had been helped by an increase in investors' willingness to hold these assets. Conditions in bank funding markets eased, with short-term interbank borrowing spreads narrowing, although contacts cautioned that improvement remained fragile."