No rate rise despite danger signals

Click to follow
The Bank of England delighted home buyers and industrialists by not raising the cost of borrowing yesterday. Diane Coyle, Economics Editor, reports on a decision that came in spite of fresh signs of pay pressures and buoyant high street spending.

Business organisations welcomed the Monetary Policy Committee's decision to leave rates unchanged at 7.25 per cent. "This decision was a tough one to make, but we believe the Monetary Policy Committee got it right," said Ian Peters, deputy director general of the British Chambers of Commerce.

The Confederation of British Industry also expressed its relief, and the pound reacted by shedding more than two pfennigs to end at DM2.96. Yet the CBI's monthly survey of business on the high street, published yesterday as the MPC finished its meeting, painted an upbeat picture of consumer spending in January.

The proportion of retailers saying sales volumes were higher than a year ago outweighed those reporting a fall by 36 per cent, slightly more than the previous month. One in five - a higher proportion than any time since September 1996 - said business was above average for the time of year.

Alastair Eperon, chairman of the CBI's distributive trades survey panel, said: "Last month's growth reported by all retail sectors is good news." But he added that higher volumes might have been achieved through price discounting in the January sales rather than reflecting a big increase in consumer spending.

A separate survey from the Engineering Employers' Federation (EEF) sent a clearer signal of potential inflationary troubles ahead. For the second month running pay settlements in the industry had increased, after remaining level for most of the second half of last year.

The average settlement reported by members in the three months to December was 3.6 per cent, up from 3.4 per cent in the three months to November.

The EEF said that although the rise was small, it represented the first signs of an acceleration in pay. David Yeandle, head of employment affairs, said January would be the key month for settlements.

Pay deals were now in line with headline inflation after trailing below it for the previous few months.

Comments