Sterling loses 1% against euro and City analysts put back forecasts of interest rate rise until late in year
A warning by the Bank of England about the fragile state of consumer spending led to a sharp fall in the pound as the City pushed back its forecast for an increase in interest rates until late this year.
The pound lost 1% against the euro in the immediate aftermath of the release of the minutes of the meeting of Threadneedle Street's monetary policy committee earlier this month, as dealers saw November as the likeliest date for the Bank to raise the cost of borrowing.
Following the recent trend, three members of the nine-strong MPC argued in favour of rates being lifted from 0.5%, but they lost out to the six other members who favoured no change.
The minutes said the near-term prospects for consumer spending had weakened over the past month. "Survey-based measures pointed to weak consumption of services in the first quarter," the minutes said. "The volume of retail sales had been broadly flat for some months. And surveys of consumer confidence had remained far below their historic average levels."
Evidence from the Bank's regional agents, published alongside the MPC minutes, also highlighted the squeeze on spending. This showed consumers switching to lower-quality products in response to weaker confidence, higher inflation and reduced spending power. "Dining out in restaurants had declined but demand for fast food continued to strengthen. And there was some evidence of a switch away from the use of private cars towards public transport," the agents said.
The report added that spending on non-essential services had dropped, with hotel bookings down year on year. Only at the top end of the market had demand for goods and services strengthened.
Of the three MPC members voting for a rise, Martin Weale and Spencer Dale regarded the policy decision as "finely balanced" and supported only a quarter-point increase in bank rate. Andrew Sentance, who will leave the MPC after the May meeting, favoured a half-point rise in borrowing costs because imported inflationary pressures and the resilience of inflation in the service sector meant the risks to the government's 2% inflation target remained "significantly to the upside".
Richard Driver, currency analyst at Caxton FX, said: "The minutes further demonstrate that the MPC will not raise rates until the UK recovery is assured. There has been some reasonable data reported from the services and manufacturing sectors this month. However on the consumer and retail side, which the BoE seems most concerned with, figures remain pretty downbeat. In addition, the minutes showed concern for the UK's exposure to the EU periphery's increasingly fragile economies. The market has now pushed back expectations of the next BoE rate rise to November."
Separately, data from the Council for Mortgage Lenders showed that lending for home loans rose by 21% in March on the previous month, but at �11.3bn was �200m below the level of March 2010. Lending in the first quarter of 2011 was 11% lower than in the last three months of 2010.
CML chief economist Bob Pannell said: "The housing market has emerged hesitantly from hibernation. Household finances are under a lot of pressure, and as a result demand for house purchase loans fell in the first three months of 2011. Lenders expect mortgage credit availability to improve this quarter, and this should help to underpin house purchase activity."
Shares lifted
More than �30bn was added to the value of Britain's top companies, as the FTSE 100 index recorded its biggest one-day points gain since last September. It finished 125.39 points higher at 6022.26, with Wall Street up nearly 200 points by the time London closed. Investors shrugged off concerns about the US economy and European debt, despite vague talk of a possible Greek default. Instead they concentrated on a number of positive corporate updates this week from companies such as Goldman Sachs and US chipmaker Intel. At the same time mining shares were buoyed by rising commodity prices, helped by a weaker dollar. Sentiment was also lifted by the latest Bank of England minutes, which suggested an immediate rise in UK interest rates was not on the cards. Giles Watts, head of equities at City Index said: "Intel kicked things off, with Asian markets posting gains of 1.6% and this continued into Europe."
Source: http://www.guardian.co.uk/business/2011/apr/20/bank-of-england-warns-of-fragile-consumer-spending
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