Digital Transformation » Systems & Software » Pressure builds for higher UK rates

Pressure builds for higher UK rates

Calls for higher interest rates to curb the upswing of the economiccycle will not be welcomed by those whose attention is increasinglyfocused on the end of the political cycle.


Growth in the earnings of quoted non-financial companies appears to have troughed. After touching 2.5% in late September the series has since recorded annual increases of close to 4%. Strong expectations of earnings growth are reflected in the sustained move of the non-financials’ P/E to above 17.


According to recent official data M&A activity amounted to #7.4bn in the third quarter, ahead of the #5.5bn In Q2, but below the #9.5bn in Q3 a year ago. Of the #7.4bn in considerations made, 46% was in the form of capital issues. This is the strongest such figure since the beginning of 1994 and continues the recovering trend in issues seen since mid-1995.


While the Chancellor may wish to follow past trends and lower interest rates prior to the election, it is unlikely he will be able to do so. Indeed, he will probably be forced by Bank governor Eddie George to raise rates again soon.


By traditional criteria US stocks look expensive, possibly very expensive.

Some commentators believe that a sharp 1987-like fall in share prices is a strong possibility. However, unlike 1987, US government bonds prices have not weakened much. Indeed in early November they made significant gains, and this is helping share valuations.


UK base rates were increased to 6% on October 30. In its latest Inflation Report the Bank of England made plain its view that further interest rate rises would be necessary if medium-term inflation targets are to be achieved.

Indeed, since the issue of the report, data for the cost of goods and materials purchased by industry has pointed to a deterioration in the outlook for inflation beyond 1997.


Reports that President Clinton and the (Republican) congressional leaders may be able to reach agreement on balancing the budget in 1997 provided sufficient impetus to bring US long-bond yields to below 6.3%, for the first time since the spring.


With signs of sustained economic recovery proving elusive, reports suggest that the weakening of the deutschmark is being welcomed by authorities there. Germany has the largest goods’ trade surplus to GDP ratio among the G7 countries, apart from Canada whose economy is less than a quarter the size of Germany’s.

Information supplied by Lombard Street Research: 0171-337 2975

Was this article helpful?

Leave a Reply

Subscribe to get your daily business insights