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This week's publication of strong UK labour market, retail sales and money supply data increases pressure on the Ch...
This week's publication of strong UK labour market, retail sales and money supply data increases pressure on the Chancellor to raise interest rates once again, and market speculation about a move at the 15 January monetary meeting has risen accordingly.

However, manufacturing is the one sector of the economy that has not been booming over the last few months, although a modest recovery is now firmly in place. There has also been little evidence of higher prices at the factory gate.

Both November's industrial production and December's producer price data will have been published by the time of this next meeting, and economists will be looking for confirmation that a stronger currency is now reducing demand for manufactured goods.

The CBI industrial trends enquiry has already produced anecdotal evidence of lower orders and output expectations. The fear of an even stronger currency is one weapon at the Chancellor's disposal, if he decides to leave interest rates on hold.

That said, the strength of activity elsewhere in the economy means that the inflation target is still at risk and on that score, despite the ammunition which the manufacturing data will afford, there is a good chance tat the Chancellor will concede to another base rate rise.

At its final monetary meeting before the year end the Bundesbank fixed a two- rather than one-year M3 money supply target, to begin in January 1997 and end at the commencement of EMU in January 1999.

The target has been set at 5% for both 1997 and 1998, while the target range has been reduced to 3.5-6.5% for 1997, from 4-7% currently. The decision will put pressure on the European Central Bank to take up the money supply as a central instrument of policy, at its formation in 1999.

The Bundesbank argues that M3 growth is the best guide to future inflation and interest rate policy. However, other counties, including the UK prefer to target the inflation rate directly.

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