Soaring credit leaves City divided on rates

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LATEST FIGURES before this week's meeting of the Bank of England's Monetary Policy Committee (MPC) left a question mark hanging over interest rates yesterday. With a record increase in consumer credit in January on the one hand, and a slowdown in manufacturing activity to the weakest pace since May 1996 on the other, City opinion was divided about whether the MPC should or would increase the cost of borrowing.

David Mackie, UK economist at JP Morgan, said: "Although growth has slowed, it probably hasn't slowed enough. The Bank is definitely on track to raise interest rates again."

In the other camp, Robert Barrie at CSFB said: "Rates ought to be left well alone. Inflation is low and monetary conditions are tight enough."

The opposing views could each claim support from yesterday's figures. January saw new consumer credit climb to pounds 1.3bn, the highest since records began in April 1993.

Mortgage lending was a shade weaker during the month, leaving total personal borrowing nearly unchanged from December, at pounds 3.2bn. Its annual growth, which has picked up in recent months, was also the same at 7.5 per cent.

Other Bank of England figures showed that the annual growth of both the narrow money measure M0, and its main component, cash, increased in February. M0 growth, at 7.2 per cent, has returned to its highest since November 1996.

The strength of credit, like recent retail sales figures, pointed to home demand remaining too strong for comfort. On the other hand, the February survey of manufacturing from the Chartered Institute of Purchasing and Supply painted a subdued picture of industry.

Output grew at an unchanged rate but the overall index of activity dipped to 51.2 from 51.8 in January. Although still above the key 50 level, the survey showed export orders were down while growth in home demand tailed off.

The new orders component of the index therefore fell sharply to 50.7, only just increasing. Only consumer goods bucked the trend, with orders jumping.

The threat to manufacturing was highlighted by the pound yesterday. It brushed close to the DM3 level before falling back to just under DM2.99.

The Bank's announcement is due on Thursday, and most analysts expect the MPC votes to be split again, as they were in January and February.

Some of the pundits who do expect the Bank to increase interest rates reckon it will not happen this week, however. Waiting another month would give the MPC some important data for the first quarter of 1998 on which to base their decision.