Still no change for sterling interest rates

Pace of UK economic growth slows in April
RBA hints at an early interest rate increase

A down-up-down move covering five and a half cents left sterling lower by an insignificant one third of a cent on the week when London opened this morning.

Not a single eyebrow was raised when the Bank of England's Monetary Policy Committee (MPC) announced on Thursday that its bank rate would remain at 0.5% for a 27th month. During that time it has become increasingly irrelevant to the real cost of consumer credit and the average rate on credit cards has risen to 19.1%. A one-off increase in the bank rate to 0.75% would indeed be a futile gesture, as the governor has earlier said. Whether or not credit card lenders would pass on the increase, taking the average rate up to 19.35%, is of little or no consequence when the cost is already so eye-wateringly high. The effect would be more noticeable on mortgages but the MPC will be conscious that 150,000 customers of Lloyds banking group are already in a position of negative equity; for the country as a whole the number is said to be nearly two million. The MPC evidently believes that making its monthly payments higher would have no conceivable benefit to the UK economy.

It was not the continuing low interest that most weighed on sterling though. The downward pressure came mainly from a series of weak and disappointing economic statistics. Purchasing managers' indices for the manufacturing, construction and services sectors were all lower by a couple of points in April, averaging 54.1. Although they were all above 50, and thus still positive, the pace of growth has slipped. Nationwide and HBOS both reported lower house prices in April compared with a year earlier. For Nationwide the fall was -1.3%, while HBOS put it at -3.7%. (The average sale went through at 163k - a long way below the 236k average asking price reported by Rightmove for the same month.) The only positive ecostats were those for producer prices. Manufacturers' costs were up by an annual 17.6% and factory gate prices rose by 5.3%. Both numbers are a worry on the inflation front and the gap between them must be a concern for manufacturers themselves. Normally such high numbers would have an upward effect on the pound because they theoretically point to higher interest rates, but that did not happen on this occasion because nobody believes there will be any reaction to the figures from the MPC.

The Australian Industry Group's performance of services index and performance of construction index are akin to Britain's purchasing managers' indices, measuring activity in those sectors. Last week they told a mixed story. Services firms appeared to be pushing ahead, with the index up by five points and in the growth zone at 51.5. Construction is flagging though. The index was down by another point and a half at 37.9. Building approvals performed strongly in March, up by 9.1% on the month, but were still -18.1% down on the same month last year.

The main impact on the Aussie dollar came from the Reserve Bank of Australia's monetary policy statement, following its decision to leave interest rates unchanged earlier in the week. Analysts interpreted the wording of the statement as pointing to an increase next month. Certainly at the time of its release the market grasped onto the higher forecast for inflation and the comment that interest rates would have to go up "at some point".

This week's Australian ecostats are restricted to business confidence, the balance of trade and employment. Of the three, it is the change in employment that is most likely to make waves. Analysts forecast that the Australian economy will have added 17k jobs in April after an increase of 38k in March.

The UK data are quite thin on the ground too, with nothing beyond retail sales, the balance of trade and industrial and manufacturing production. The most important event ought to be the Bank of England's Quarterly Inflation Report. However, in his speech of introduction to the report, the governor is likely to stick to his line that inflation will fall back next year, thus divorcing the QIR from monetary policy.