Next rate rise predicted for May
Thursday 06 April 1995
The economic betting followed no move in the rates after yesterday's monthly meeting between the Bank of England Governor, Eddie George, and the Chancellor, Kenneth Clarke.
The Chancellor was doubtless able to muster an economic as well as a political case for keeping rates on hold. The latest cyclical indicators published by the Central Statistical Office point to a slowdown of the economy in 1995. Indeed, the two indices that lead the economic cycle suggest that the upswing from the low point of early 1992 may already be approaching its peak - a revelation hardly designed to restore the notorious feelgood factor, still less morale on the Tory back benches.
While Mr Clarke had claimed on the BBC Today programme that "we have two more years of strong industrial recovery", the Treasury's regular monthly report for the meeting used more sober language. The most recent monthly indicators were "consistent with a modest slowdown in growth to a more sustainable rate". Manufacturing output and retail sales had been flat over the latest three-month periods and the housing market remained in the doldrums.
The Confederation of British Industry had some encouraging news for the Chancellor when it revealed a drop in manufacturing pay awards in the three months ending February. Compared with the period ending January, settlements reported to its databank had fallen from 3.0 per cent to 2.9 per cent, well down from their recent peak in November.
The trouble for the Government is that the recent plunge in the pound threatens to undo the attempts made to keep inflation at bay.
Since the Governor last put up interest rates in early February, the trade-weighted index has fallen by over 4 per cent. On conventional calculations, this more than offsets the disinflationary effect of that last rise, as higher import prices feed through to the economy. One indicator of that pressure was this week's purchasing managers' survey for March, which the Treasury accepted in its report "continues to suggest input prices are growing strongly".
It is because of the potential inflationary impact of continued sterling weakness that most City analysts still expect interest rates to move up before long. Since the pound has suffered mainly as a side-effect of the dollar's weakness, the Government must be hoping for a recovery in the dollar. But concerted intervention by the Federal Reserve, Bundesbank and Bank of Japan to buy dollars propped up the US currency only temporarily yesterday.
And any hope that the Fed would help out with a rise in interest rates was extinguished by further evidence of weaker growth in the US, suggesting there will be no rise in interest rates until at least the 23 May meeting of the Fed's policy committee. The leading indicator of the economy fell 0.2 per cent, the biggest drop since mid-1993. And wholesalers' stocks rose 1.2 per cent, the eighth monthly rise in succession, due to weaker demand.
The dollar managed to gain a pfennig against the mark after several rounds of intervention. Dealers put total intervention at about $2bn - in a market whose turnover is estimated at $1,000bn a day. However, the dollar had lost a pfennig earlier in the day and retreated again later. By noon in New York, it was stuck at DM1.3850 and Yen86.50, near its previous closing values.
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