Pundits braced for interest rate hike

THE CITY was yesterday steeling itself for further interest rate hikes following the publication of stronger-than-expected economic data.

The Office of National Statistics (ONS) said the UK current account was in surplus by pounds 116m in the last quarter of 1997 - economists had predicted the account would go into the red.

The better-than-expected current account figures were largely due to a pounds 2.7bn surplus in investment income. The deficit in traded goods rose significantly - from pounds 2.8bn to pounds 4.2bn - suggesting UK exporters are still being squeezed by the high pound.

Economists were also surprised by an upward revision to economic growth over the last quarter of the year.

The ONS said GDP grew by 0.6 per cent between October and December last year, an upward adjustment of 0.2 percentage points. GDP growth for the year as whole was revised downwards slightly from 3.2 per cent to 3.1 per cent.

Dharshini David, economist at HSBC Markets, said: "The big surprise in these numbers [the GDP figures] was the upward revision to quarter-on- quarter GDP, largely reflecting upward revisions to the consumer expenditure component."

Anticipation of a forthcoming interest rate rise sent sterling rising against the mark. The pound closed up almost a pfennig at DM3.035, down from the day's high of DM3.05.

Kevin Darlington, economist at ABN Amro, said: "Upwardly revised consumer spending will favour the interest rate hawks".

Minutes from the February meeting of the Monetary Policy Committee - which sets UK interest rates - revealed the committee was split four against four on whether to raise rates. Only the decision by Eddie George, Governor of the Bank of England, to use his casting vote for a rate freeze kept the cost of borrowing on hold at 7.25 per cent.

The City will now be anxiously waiting for January earnings data, due out next Wednesday along with February unemployment figures. Strong growth in pay could persuade the MPC to raise rates at its next meeting.

Charles Goodhart, one of the MPC hawks who voted to raise rates in February, said yesterday: "Half a per cent [year-on-year pay growth] is probably sustainable with the present inflation target but if it goes very much further, either in wages or earnings, then I think there would be severe difficulties in meeting the 2.5 per cent target".