Sterling higher as survey shows dip in retail sales

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Inflation at the factory gate remained very subdued last month, according to new figures yesterday. But City analysts said a further increase in interest rates was on the cards, and the pound climbed still higher on the foreign exchanges yesterday.

Separately, a survey by the British Retail Consortium showed a slight dip in spending on the high street last month due to the bad weather. It reported "healthy" sales volumes with building society windfall gains filtering through in sales of expensive items such as electrical goods.

Nevertheless, the BRC said there was no further need for the Bank of England to dampen consumer spending.

Adair Turner, director-general of the Confederation of British Industry, said the Budget had missed an opportunity to clamp down on consumer demand. But in a speech last night he said: "Tough though it may be for exporting companies, one of the reasons that sterling is so high is international confidence in the British economy's underlying strength."

Regardless of the fears about interest rates, share prices set another record yesterday. The FTSE 100 index ended 58 points higher at 4,857.4, helped by a strong opening on Wall Street.

Prices paid by manufacturers for their materials fell by 0.8 per cent in June, according to official figures yesterday. Much of the decline was due to lower petrol prices, but there was still a 0.2 per cent drop in underlying costs thanks to lower import prices in terms of sterling.

Prices charged at the factory gate fell 0.2 per cent in June. Although their year-on-year rate of increase edged up, it remained low at 1.1 per cent.

But "core" output prices, excluding food, drink, tobacco and petrol, rose 0.1 per cent in June. Their annual rate of increase remained unchanged at 0.6 per cent.

"A key message is the absence of inflationary pressure in manufacturing," said Richard Iley at Hoare Govett. Even so, some said the news should have been even better.

"Manufacturers might have been expected to respond by cutting prices more aggressively," said John O'Sullivan at NatWest Markets. "It looks like they are protecting margins rather than market share."

The BRC's monthly survey showed sales weakening in weather-related areas such as summer clothing, beer and sun creams, thanks to the June downpours. Electronic items enjoyed a very good month, and housing-related areas such as furniture and DIY were strong.

The value of total sales rose 8.2 per cent in the year to June compared with 8.3 per cent in May. On a like-for-like basis sales growth slipped to 4.5 per cent from 4.8 per cent.

The Bank of England's next step would hinge on figures for average earnings growth, due tomorrow, and the estimate of GDP in the second quarter, due next week, analysts said.

Unless either shows a significant slowdown, most reckon the Bank's monetary policy committee will feel compelled to act again, perhaps as early as next month's meeting. "The currency markets are right to see the prospect of a further interest rate increase," said David Owen of Kleinwort Benson.

Sterling climbed from just under DM3 to DM3.02 yesterday, while the pound's index against a range of currencies gained 0.5 to end at 105.5.