U.K. DATA DEPRESS RATE CUT OUTLOOK - ANALYSTS
Today's U.K. Economic data have pushed
the chances of another base lending rate cut from the current
nine pct further into the distance, analysts said.
    A record fall in unemployment and good manufacturing
production data showed that the economy is still strong and
does not need a fillip from lower rates.
    News that underlying earnings are rising 7.75 pct annually,
taken together with higher than expected bank lending and money
supply growth, revived inflation worries and monetarist
arguments against easier credit, they said.
    "The timetable on lower interest rates is being pushed back
all the while. The strength of the economy and broad money
growth are making it more difficult to see one in the near
term," said Chase Manhattan Securities economist Robin Marshall.
    Analysts have reached this conclusion despite yesterday's
mortgage rate cuts for new borrowers, which building societies
said were a sign of the expected near term trend for U.K.
Rates.
    It also counters the optimistic forecasts of last week that
a post-general election cut was imminent, supported by such
optimistic economic news as May's record reserves rise which
mirrored the Bank of England efforts to cap sterling's
strength.
    The gilt market lost nearly half a point as enthusiasm
about May's 64,300 fall in the seasonally adjusted unemployment
rate, to 2.95 mln or 10.6 pct of the workforce, was rapidly
replaced by dismay at the continued high level of underlying
average earnings in April, dealers said.
    The upset was compounded by news that sterling bank lending
rose 2.7 billion stg in May, above forecast, and that the Bank
of England looks likely to have to sell more gilts to offset
the impact on domestic money supply of its current
intervention.
    "The gilt market reaction was correct," said Bill Martin,
chief U.K. Economist at brokers Phillips and Drew.
    "That's very important ... It shows the economy in a very
good state indeed," Skeoch said.
    "There's no reason to get worries about inflationary
pressures because they're very subdued." Unit wage cost rises
were better than expected, just one pct higher in the year to
April, and it was these costs rather than average earnings
which were potentially inflationary, he added.
    "I don't think these average earnings numbers are a major
problem," agreed Chase Manhattan's Marshall.
    But he said the gilts market was likely to remain worried
about the funding implications of recent intervention.
    He said the inflow of foreign money into sterling assets
earlier this year, attracted by growth prospects and hopes that
the ruling Conservatives would win last week's election, now
looks likely to prevent a base rate cut as the authorities try
to prevent these funds swelling the domestic money system.
    However, David Owen, U.K. Economist at Kleinwort Grieveson
Securities, said any fresh sterling strength would still
trigger a base rate cut and that today's figures did not signal
higher inflation this year.
    "Wage increases are being offset by productivity growth. As
long as that continues we're okay," he added.
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