Surge in pound puts a damper on growth
Friday 31 January 1997
Martin Weale, director of the National Institute and one of the Treasury's six "wise persons", said the rise in the currency since the summer meant there was no need for an immediate rise in interest rates. The Chancellor of the Exchequer will welcome his change of mind, as Mr Weale was formerly one of the strongest advocates of the need for higher borrowing costs to squeeze consumer demand.
Meanwhile the pound fell sharply yesterday as new figures brought further evidence of robust consumer spending. New consumer credit in December exceeded pounds 1bn, while house prices have risen by 0.7 per cent this month, according to Nationwide Building Society.
But there were welcome signs that the housing recovery has not turned into an unsustainable boom. Halifax expects its January house price index due next week to show little change during the month. Separate Bank of England figures yesterday showed a small drop in the value of mortgage borrowing during December, although its year-on year-growth was higher than in November.
The batch of figures yesterday was unlikely to sway the debate at next week's meeting between Kenneth Clarke, the Chancellor, and Eddie George, Governor of the Bank of England, City economists concluded. Few analysts expect Mr Clarke to agree to an increase in base rates despite the likelihood that Mr George will once again recommend it.
The pound is Mr Clarke's strongest argument. Sugar giant Tate & Lyle and engineers Staveley Industries yesterday joined the ranks of companies - including British Steel, Cookson, Guinness, Rolls Royce and Zeneca - whose earnings have suffered from the exchange rate move. However, sterling's index against a range of currencies fell by 0.4 to 95.2, and the pound fell by more than a pfennig to DM2.6463.
Mr Weale writes in the latest review of the economy from the National Institute: "It would be perfectly satisfactory to delay any rise in rates until it became necessary to support the exchange rate."
The new forecast predicts a slowdown in exports growth to about half last year's pace. It also shows the balance of payments tumbling deeper into the red this year and next, with the shortfall between exports and imports reaching pounds 2.8bn this year and pounds 4.4bn in 1998.
However, it still foresees a big increase in consumer spending in 1997 - and reckons this will feed through to a rise of more than 10 per cent in house prices.
Nationwide yesterday reported a 0.7 per cent rise in its house price index in January, in line with recent months. The 12-month increase slowed a fraction to 8.2 per cent. Higher prices were drawing more properties on to the market, making the upturn in sales more broadly based.
Paul Sanderson, head of research for the building society, said: "If previous patterns are repeated, 1997 will see the recovery gain a firmer hold in regions outside London and the South-east, where improvements have been concentrated."
Bank of England figures for December showed a month-on-month fall in the value of net mortgage lending, to pounds 1.6bn, but its year-on-year growth rate climbed to 4.8 per cent.
"The fall in new approvals suggests that the withdrawal of cheap fixed- rate deals is dampening down mortgage demand," said John O'Sullivan, an economist at NatWest Markets.
The Bank of England also reported another pounds 1bn-plus monthly increase in consumer credit in December, which is growing at an annual rate of nearly 17 per cent. It was the fifth increase in six months, and suggests that consumer spending is still growing strongly.
- 1 Michael Douglas regrets 'embarrassing' Catherine Zeta-Jones with oral sex comments
- 2 Tunisia hotel attack: Locals form 'human shield' to protect hotel from gunman Seifeddine Rezgui
- 3 Tunisian builder has been hailed a hero after knocking gunman to the ground with roof tiles
- 4 German ethics council calls for incest between siblings to be legalised by Government
- 5 E.L James's #AskELJames Twitter Q&A didn't go exactly as planned
Michael Douglas regrets 'embarrassing' Catherine Zeta-Jones with oral sex comments
Tunisia hotel attack: Locals form 'human shield' to protect hotel from gunman Seifeddine Rezgui
Dutch city of Utrecht to experiment with a universal, unconditional 'basic income'
Tunisian builder has been hailed a hero after knocking gunman to the ground with roof tiles
German ethics council calls for incest between siblings to be legalised by Government
The moment a Queen's Guard soldier lost it and drew his gun at annoying tourist
Greece crisis: The wider lesson is that it’s time to abandon this failed experiment in currencies
'I wish the BBC would stop calling it Islamic State' – David Cameron unleashes frustration at broadcaster
Extend Right To Buy to tenants of private landlords, Labour's Jeremy Corbyn says
David Cameron struck double blow in his hopes to win Britain a new EU deal
Pentagon accuses Russia of 'playing with fire' over nuclear threats towards Nato
iJobs Money & Business
£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...
Negotiable: Recruitment Genius: This extremely successful and well-established...
Competitive with monthly bonus: Guru Careers: We are seeking an experienced FX...
Competitive (Freelance) : Guru Careers: An Investment Writer / Stock Picker is...