Still no increase for UK interest rates

It was a good week for the Australian dollar that included a new record high against the US dollar. The pound started well, rising by two and a half cents on Monday and Tuesday, but finished badly, giving back all that and more. When London opened this morning the pound was a net one cent lower on the week.

Sterling's week revolved around interest rates; specifically Thursday's decision from the Bank of England's Monetary Policy Committee (MPC). Nobody expected any change to the 0.5% Bank Rate that had been in force for 25 months, nor to the asset purchase programme that has seen the Bank buy 200 billion of government and other bonds. So why the excitement? Well, it's tradition, really. Anyway, the Bank might have sprung a surprise rate increase, given that inflation is knocking 4.4% off the value of everyone's savings annually. But of course the Bank did nothing but issue the same statement it has used since July last year, explaining what it was not doing. The market will have to wait for another ten days to find out from the minutes of the meeting the reasons for the inaction. It is fair to guess that the MPC did nothing because a majority of the committee expects inflation to subside of its own accord, without the need for higher interest rates.

The week's economic statistics were, on balance, positive for sterling but were not unanimously so. Industrial and manufacturing production in February were a serious disappointment. Manufacturing production was static and industrial production (manufacturing plus mining and energy) was down by -1.2%. Balancing the equation were the purchasing managers' indices (PMIs) for the construction and services sectors in March. Both were better than expected. The construction PMI was almost unchanged at 56.4 and the manufacturing index surprised everyone with a four-and-a-half point rise to 57.1. The Halifax house price index went up by the smallest possible 0.1% increment in March but was -2.9% down on the year and accompanied by the Halifax's expectation of "a 2% decrease in house prices in 2011 as a whole".

Producer price index (PPI) data on Friday were either positive or negative for sterling, depending on how you think the Bank of England will respond to the 5.4% annual rise in factory gate prices and the thumping 14.6% increase in manufacturers' costs. In theory, they will feed through into yet higher consumer prices and that will make the Bank more inclined to raise interest rates. In practice, the Bank believes all this rising price nonsense is a temporary phenomenon that will vanish next year. Time will tell.

The Australian dollar was among half a dozen currencies that led the field with little to choose between them. It was a motley crew, including the NZ dollar, the Norwegian krone and the Swiss franc, and there was no obvious reason for the combination. There were plenty of Australian economic data though. AiG's performance of services index - the services PMI with a different hat on - was two points lower at even further into the shrinkage zone at 46.5. The balance of trade clocked an unexpected $205 million deficit in February. Investment lending was down by -2.3% in February and mortgage lending fell by -5.6%. The construction sector PMI fared even less well than the services index, down by five points to 39.4.

But it was not all bad news. The rate of unemployment was down from 5.0% to 4.9% in March and nearly 38k people found jobs. The employment change number was well ahead of the 24k increase analysts had predicted and was a welcome reversal of the previous month's 10k job losses.

The coming week's Australian data will not be a great deal of help. There are confidence measures for companies and consumers, motor vehicle sales and consumer inflation expectations. In the UK the interest rate debate will continue, with consumer price index (CPI) inflation scheduled to remain steady at 4.4% on Tuesday. The following day brings the employment figures, with an expected fall of 3k in the number of people claiming jobseekers' allowance and an unemployment rate unchanged at 8%.