26 June 1998

Fears of further interest rate rise as sterling grows stronger

By Robert Harris

STERLING has strengthened markedly in the past few days, fuelling fears of a further interest rate rise next month, more pressure on prices and increased borrowing costs.

Recent higher than expected average earnings figures, coupled with unexpected jumps in the retail price index and spending, are adding to inflationary pressure.

The prospect of another interest rate rise – a month after the last one – has rekindled speculator interest in sterling. Over the past two weeks, the £ has gained almost 6 pfennigs against the deutschmark, breaking through the 3DM barrier at the start of the week, its highest level since mid-April.

"We had hoped we had turned the corner," said NFU chief economist Sion Roberts. He believes rumours that the European Central Bank will set interest rates as low as 3.5% next year is adding to the run on the £.

"Interest rates could stay wider for that bit longer. That is bad news for all sectors of agriculture." The recent gain also makes a devaluation, which would have raised arable area payments, impossible.

Revaluation long way off

But a revaluation is also a long way off – on Wednesday, the green £ gap stood at 2.6%, well below the 5% needed to trigger a move in that direction. Even if it happened, direct payments would not be affected if the European Commissions agrimoney proposals go through unchanged, as next years direct payments will be set according to this years levels, adds Mr Roberts. Home-Grown Cereals Authority economist James Baugh says future movements are very difficult to predict.

"If interest rates do go up again, we could see the £ move into revaluation territory. We have been some marked rises and falls in a very short time."

New crop has been affected by the rise, though other fundamentals – notably a UK wheat crop forecast of over 16m tonnes – have added to pressure. Harvest prices moved back midweek to £71.50/t delivered to East Anglian destinations, and £77.50/t for Oct-Dec movement.

Old crop is in short supply so bucked the trend. Feed wheat put on about £6/t to make £83/t for July deliveries in the same area. &#42