CREDIT growth slowed in September, easing fears of rising inflation and indicating there is no pressure for higher interest rates for the moment. Mortgage lending, however, remained buoyant and money supply grew strongly.
Underlying credit growth was 13.3 per cent at the end of September, from 14.2 per cent in according to the Central Bank's latest figures, published yesterday. A large jump in credit growth in September 1995 was one reason for the fall in the annual growth rate this year.
The Central Bank will welcome the fall. It had been pointing to high credit growth figures as a reason to possibly raise interest rates. Nevertheless, in its commentary on the figures it pointed out that underlying credit growth had still risen by 6.5 per cent over the last six months.
"The bottom line is the overall number was lower than expected," said Mr Jim Power, chief economist at Bank of Ireland. "But interest rate nervousness over the last six months has more to do with exchange rates."
Mortgages continued to grow, albeit at a slower level than last spring. Residential mortgage lending was up 16.5 per cent year«MDBO» «MDNM»on year in September, compared with 16.3 per cent in August and 16.1 per cent in July.
The figures also showed that the Central Bank intervened heavily in the money markets in September. The Bank does not release exact figures, but Dr Dan McLaughlin, chief economist at Riada Stockbrokers, said he thought the Bank probably sold around £800 million in pounds in August and September.
"That compares to a likely overall figure from April to December 1995 of £1 billion."
However, in recent weeks, the Central Bank has reversed its intervention policy. It has been buying pounds in an attempt to drive the pound back up against sterling. A sustained fall in the pound's value against sterling would generate inflation through increasing import prices from Britain. The pound's weakness, together with the credit figures, has led to some fears in recent weeks about pressure on inflation and interest rates.
Yesterday the Bank saw no need to intervene in the foreign exchange markets as the pound traded comfortably above parity against sterling.
The pound knocked up some small gains to close at 100.23p from 100.14p a day earlier, after sterling and the dollar both fell on foreign exchanges. It also followed sterling down against the deutschmark. It closed the day at DM2.4897 from DM2.4928 a day earlier.
But sterling's setback may prove temporary, according to British economists.
"Sterling mainly fell because of the Bank of England's warning the day before that it may have risen enough," said Mr Graham Cocks, vice president of corporate treasury at the Bank of Boston.
"It would probably be very healthy for it to fall a little. But there are plenty of people who need to buy. If you bear in mind the forward discount you can buy it now for April or May at DM2.45 or DM2.46. We believe it will be around DM2.50 by the time of the election so there are a lot of people buying on the dips."
Mr Jonathan Griggs, chief money market economist at BZW, said he remained fundamentally bullish on sterling until the end of the year.
But other economists were less sanguine about the Bank's report. "The Bank of England certainly isn't pulling its punches now," said Mr Tom Rayner, UK economist at Societe Generale.
"The inflation report has definitely been unsettling for the markets. Talk of the need for higher rates and that the rise in sterling could be temporary is a pretty potent combination to upset foreign investors."
