Consumer confidence at highest level since July

CONSUMER confidence rose sharply in January, the third successive month in which confidence has improved, according to the latest Gallup poll for the European Commission.

Initial details of the poll also show that the number of consumers who think this is a good time to make large purchases has surged.

The poll shows general confidence at its highest since last July. The balance of consumers expressing general confidence in the economy stands at minus 13 per cent, compared with minus 22 per cent in December and a 1992 trough of minus 28 per cent in October.

The number of consumers who think this is a good time to make big purchases stands at its highest since late 1988. The balance of plus 18 per cent compares with a trough of minus 20 per cent at the end of 1990. The January figure is sharply higher than the plus 4 per cent balance recorded in December and November.

The surge in confidence coincides with renewed hopes of an early cut in interest rates, which emerged late this week and strengthened after yesterday's fall in the pound.

The pound's latest losses, the third daily fall running, came as money market interest rates also pointed to expectations of an early cut in bank base rates after revived concern emerged over the weak state of the British economy.

Yesterday, sterling lost 1.49 pfennigs to close at DM2.4374. But a weak dollar left the pound 1.05 cents better, at dollars 1.5253. In the past two weeks, the pound has lost 8 1/2pfennigs and some senior Treasury officials are understood to be worried about the weakness of the exchange rate. Only the weakness of the dollar has limited sterling's overall decline. Against a trade-weighted basket of currencies, the pound ended just 0.1 points lower at 79.8 per cent of its 1985 value. In the past two weeks, sterling has retreated 2 per cent on a trade-weighted basis.

Renewed expectations of a fall in base rates, currently 7 per cent, followed the latest batch of gloomy evidence on the weakness of the economy and came before the latest confidence figures. Unemployment in December surged towards the 3 million mark.

Unexpected falls in November manufacturing output and December retail sales also undermined hopes that spending was bringing the economy to life.

In the money markets, the three-month interbank rate, which reflects City base rate expectations, was quoted at 613 16 per cent, its lowest level since the start of the year. This was the second successive day that the rate signalled a change in sentiment over base rate trends and confirmed that expectations of lower base rates were becoming entrenched.

Interbank rates and sterling futures suggest a half-point cut in rates is being priced into the markets. But some City economists think deeper cuts will emerge eventually, especially if mortgage rate cuts are to be triggered.

Whether the Treasury will concede a further reduction in rates appears to depend on the January inflation figures, which will be released on 12 February.

Fears that the effects of the steep devaluation of the pound will start to feed through to the retail price index will need to be calmed before the authorities can act.

In addition, anecdotal evidence that manufacturers are trying to rebuild their profit margins and have already begun to push up factory gate prices may emerge in the January producer price index, released on 9 February.

The prospect that narrow money supply growth will breach the 4 per cent target ceiling in January may also undermine base rate hopes. But several analysts said these figures were a less reliable guide to inflation pressures and might reflect less credit card use rather than greater demand.