Sterling concern kept interest increase
Thursday 14 August 1997
The harshness of the policy dilemma emerged as the pound fell sharply against the German mark again yesterday, held back by the Bank's apparent conviction that interest rates do not need to rise in the short term and by a rising belief in Germany that base rates there are about to increase.
The pound fell by more than 4 pfennigs yesterday to under DM2.90, shrugging off strong labour market data that showed an unexpectedly large fall in the unemployment rate which might normally be expected to put upward pressure on interest rates. The jobless number was mitigated by average earnings numbers showing subdued wage pressures.
Minutes of the MPC's July meeting showed that the committee had considered whether a larger interest rate rise might create uncertainty about the future direction of rates which might put less upward pressure on the exchange rate. It concluded, however, that a half-point rise might actually lead to economists factoring in a higher peak to the interest rate cycle and an unnecessary appreciation of sterling.
The relative attraction of the mark was heightened yesterday by a hawkish assessment of German inflation by the Bundesbank. In its monthly report, the German central bank said inflation had picked up and warned it would steer policy to ensure price stability.
The movement in exchange rates confirmed the view that the rise of sterling in recent months has had more to do with the weakness of the German currency than its own inherent strength. The mark also appreciated by around 3 pfennigs against the dollar yesterday following US producer prices data showing a seventh successive month of declining prices.
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