Pound's fall 'final nail in coffin' for base rate

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The Independent Online
The rising head of steam for an increase in base rates on Friday at the meeting between the Chancellor and the Governor of the Bank of England showed little sign of abating as new evidence emerged about the potential inflationary impact of the recent fall in the pound. This is likely to prove "the final nail in the coffin" for the current level of base rates, said Kevin Darlington, UK economist at Hoare Govett. Expectations of a rise in rates bolstered sterling in the foreign exchange rates, pushing the pound up 2 pfennig against the Deutsche Mark.

Prices paid by purchasing managers in manufacturing industry jumped sharply in April to reach their highest level since the increasingly influential monthly survey was first published by the Chartered Institute of Purchasing and Supply (CIPS) four years ago. The seasonally adjusted prices index, which indicates rising prices when it exceeds 50, rose from 76 in March to 81 in April.

According to CIPS, the primary reason given by purchasing managers for the rise in prices was the increase in import prices resulting from the recent plunge.in the pound. This is likely to add to the Governor's concerns about the weakness of sterling this year. When Eddie George met Kenneth Clarke on 8th March, he expressed worries about the fall in the trade- weighted index to 86. Despite the pound's favourable performance yesterday, it closed last night a point lower than then, at 85.1.

The jump in the CIPS price index contrasted with last week's CBI Industrial Trends Survey, which showed a slowdown in price expectations since the start of the year. Both the CIPS and the CBI surveys were cited as evidence of "cost pressures spreading along the production chain" in the minutes of the meeting in February which raised interest rates to their current level of 6.75 per cent. The CIPS survey picks up inflation pressures within the manufacturing sector in the form of the prices paid for intermediate goods as well as those for materials and fuel which have shown some recent signs of coming off the boil.

Another pointer to underlying inflationary pressures within industry was the lengthening of delivery times, an indicator in a similar American survey which the Chairman of the US Federal Reserve, Alan Greenspan, is known to follow closely. This evidence of supply constraints fitted in with strong evidence in the CBI report of rising pressure on capacity. The overall Purchasing Managers' Index stayed at 56, a level which indicates a continuing buoyancy to the manufacturing sector which is at odds with official data that shows it stagnating.

A lower than expected increase in the narrow measure of the money supply, M0, pointed to the problem the Chancellor faces in raising rates. With notes and coin its principal component, this monetary series has tended to track - though far from exactly - retail sales. The decline in its growth rate can be interpreted as a further indication of the weakness in the high street.

Meanwhile in the US, a similar purchasing managers survey conveyed a mixed message about the outlook for the US economy in the second quarter of the year.

The overall index came in stronger than expected, mainly because of higher orders and production. On the other hand, the prices index fell sharply from 79 in March to 73.