THE British Labour government's sterling crisis deepened yesterday when the British currency rose to its highest level for six years on City fears of sharply higher British interest rates to curb surging inflationary pressures. Sterling continued its inexorable rise to three deutschmarks, climbing a further 1.9 pfennigs to DM2.9690 having reached DM2.9795 at one stage, and breached the 10 French franc-barrier for the first time since 1991. The currency's trade-weighted "basket" index firmed 0.9 to 104.2 extending the effective sterling revaluation since last August to nearly 20 per cent.
Sterling has moved ahead strongly over the past week following the failure of Chancellor of the Exchequer, Mr Gordon Brown's maiden budget to curb consumer demand and the currency was driven still higher yesterday by figures disclosing an unexpected surge in inflation. Last month's annualised rate of "headline" inflation measured by Retail Price Index (RPI) jumped from 2.6 to 2.9 per cent while the underlying rate, excluding mortgage interest payments, rose from 2.5 to 2.7 per cent.
Both increases surprised the City of London's industry of economists. Most seers had predicted unchanged or lower inflation due to downward price pressures on key consumer goods caused by sterling's revaluation.
Much of the blame for the RPI increase can be attributed to increases in mortgage interest following the decision of the Bank of England's new - Monetary Policy Committee (MPC) to lift bank "base rates" by 0.25 to 6.5 per cent. Although year-on-year costs of alcohol and petrol increased slightly, costs of food, fuel, household goods and clothing declined in line with City expectations.
It is a matter of some irony, therefore, that last month's quarter point increase in interest rates to curb inflationary pressures has contributed to further pressure on the MPC to lift rates again at its monthly meeting tomorrow. A quarter-point increase to 6.75 per cent is widely expected and a 50 basis points increase will not surprise the markets.
Monetary tightening through higher interest rates may be deemed necessary to hold inflationary pressures in check but any further strengthening of sterling can only exacerbate the real difficulties now being faced by manufacturing industry.
