View from City Road: Scope for a cool appraisal of rates

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Shares and gilts greeted yesterday's encouraging bank and building society lending figures with studied indifference. Instead of falling in response to heightened fears of rising interest rates, they rose in line with bond markets overseas.

But even bulls are hesitating before declaring that the markets have turned a corner and are about to repair the carnage of recent months. The improvement may owe more to the covering of short positions and chartist pronouncements than to a fundamental change in sentiment. Certainly, there's little sign of a return of institutional buying interest. With almost all this month's UK economic data now released, the markets have an opportunity to reappraise prospects for base rates.

The figures generally suggest that fear of April's tax increases has not inflicted serious damage on the pace of recovery ahead of the event; the ex post reaction, of course, remains unknown. News on inflation has been mixed, with good retail and producer price figures, but an ominous pick-up shown in the growth rate of average earnings.

All this suggests that Kenneth Clarke may begin to edge interest rates higher around the turn of the year, but perhaps only after cutting them once again during the course of the summer.

Either way, the forecasts implicit in the sterling futures market of 6 per cent base rates at the end of this year and 8 per cent at the end of next are surely still erring on the pessimistic. If so, the short end of the gilts market at least may be set to outperform.