ARE STERLING INTEREST RATES GOING UP?
· Some analysts think so; this week's inflation figures may provide a clue.
· Australian employment change disappoints.
Sterling continued the previous weeks advance until Friday, when it paused to take stock. It opened in London this morning three and a half cents better on the week.
Sterling had a fairly easy ride through the week's few economic statistics. Having managed to dodge a fall in the Halifax house price index it went on to sidestep a -0.3% drop in the British Retail Consortium's retail sales figure, taking the BRC's word for it that it was only the hideous weather in December that spoiled the result. Another record monthly trade deficit was close enough to forecasts to avoid doing any damage. Industrial and manufacturing production figures were both higher in November, manufacturing by 0.6% and the broader industrial production (including mining and energy) by 0.4%. They, too, were in line with expectations.
The figures that did make a difference - and a positive one - were Friday's producer price index (PPI) numbers. They were pretty punchy. Manufacturers' costs increased by 12.5% in the year to December while factory gate prices rose by 4.2%. Leaving aside the implication that gross profit margins are being horribly squeezed, the 4.2% rise in factory gate prices suggests that at least some of the increase must pass through to retail prices.
Although the Bank of England made no change to monetary policy on Thursday and has said nothing to suggest that interest rates are going up any time soon, the PPI numbers prompted investors to wonder whether they might. Rightly or wrongly the market has begun to think a rate increase will come sooner than previously thought. Some analysts say May. Consumer price index (CPI) inflation data this week are expected to show an official inflation rate of 3.3%. The old retail price index (RPI), arguably a better measure of the real cost of living, could be up by 4.8% on the year. Add to that a belief among the general public that prices will rise by 3.9% this year and the pressure for a rate increase becomes even greater. It is all very well for the Bank to say the current high inflation rate is the result of temporary pressures - it may even be true - but if people and businesses believe it will rise even further the belief itself will push prices higher. An early interest rate increase could be used to nip that idea in the bud.
With the European currencies pushing ahead, led by the euro itself, anything with "dollar" in its name fell to the rear. The Aussie was not the biggest casualty but it lagged behind its Canadian and New Zealand cousins, losing-2% against the pound and -3% against the euro. The Australian economic data could not really be blamed. Retail sales were up by 0.3% in November, partially reversing the previous month's -0.8% decline. November's $1.9 billion trade surplus was very close to forecast. Home loans for that month were up by 2.5% while investment lending was down by almost exactly the same proportion.
Most important were the Australian employment data, particularly the figure for employment change in December. After unusually strong jobs growth of 54.6k in November the predicted 25k would have been anticlimactic on its own. The number announced on Thursday was even more of a disappointment at just 2.3k, as near to unchanged as makes no difference. The Aussie dollar had a mad half-hour, strengthening immediately ahead of the announcement and falling by a cent when the news came out, but the numbers had no lasting impact.
There is no particular focus in Australia this week. New vehicle sales will probably be -3.1% down in the year to December and consumer confidence will probably be lower after the Ashes series. For sterling the obstacles will be CPI inflation, employment, public sector borrowing and retail sales, all of which are important numbers. It is probably fair to assume the inflation data will be helpful but the others are in the lap of the gods.