Pound dives as inflation cheer allays rate fears

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The Independent Online
Brighter news on the inflation front pushed the pound sharply lower yesterday, with analysts confident that there is no danger of a rise in interest rates before the general election. Prices charged by manufacturers at the factory gate were flat last month, while a survey suggested growth in high street sales was weaker than expected.

Eddie George, Governor of the Bank of England, helped by saying he expected underlying inflation to reach its 2.5 per cent target this year. But he added: "The question is not whether we will reach it but maintain it."

Most City experts share the Bank's view that inflation will not stay on target for long, requiring a post-election increase in the cost of borrowing. Nevertheless, the pound lost more than three pfennigs to end at DM 2.7270, while the FTSE 100 index rose just over 17 points to a record 4,437.4.

"The figures will help Kenneth Clarke in the monetary debate," said Andrew Cates, an economist at UBS, the investment bank. The Chancellor and Mr George are due to hold what is likely to be their last monthly meeting on 10 April, and the Governor is still expected to repeat his call for a small rise in base rates unless the economic picture changes dramatically before then.

The level of prices at the factory gate was unchanged in February, taking their year-on-year increase down to 1.3 per cent, the lowest since oil prices collapsed in 1986.

The prices paid by manufacturers for raw materials fell 0.5 per cent during the month, taking them to a level 6.6 per cent lower than a year earlier. The strength of the pound combined with a fall in dollar oil prices accounted for the drop. Food and metals costs rose.

Separately, the British Retail Consortium's monthly survey showed that growth in the value of high street sales, on the same basis as last year, was 4.3 per cent. This was lower than January and about the same as December. The BRC described it as healthy but steady growth.

The impact of the exchange rate on prices on the high street showed most clearly in the London stores. For the second month running tourist demand was reported to be down.

Growth in the value of food and drink sales was also weaker than previously. Intense competition between retailers meant lower import prices were passed on to consumers.

But other areas, including clothing, housewares and carpet and furniture orders, showed a pick-up in sales growth. DIY and department stores also had a good February.

"Incomes are rising, unemployment is falling and consumer confidence is very high. Yet we are asked to believe that consumers are nervous about spending because of the election. That's not credible," said David Hillier, an economist at BZW, predicting higher inflation later this year.