The Government should be concerned by the latest news on the economy. Unemployment increased again last month and there is upward pressure on interest rates. After months when most of the economic figures were pointing in the right direction, Ministers will be hoping that their luck is not about to change.
It is too early to say for certain that bank and building society interest rates will rise. But an early increase became more likely yesterday when one month interest rates on the money market traded at over 5.5 per cent for the second day in a row. Unless this rate falls back over the next week or so, the banks and building societies will move to pass the increased cost of funds onto borrowers. Depositors would, of course, stand to gain from a rate increase.
The Central Bank may wish to see interest rates rise to cool the property market and slow the general increase in borrowing. It may be, on the other hand, that the bank will be content, for the time being, to see the threat of an increase hang over the market. This in itself might slow the rise in borrowing, which is now running more than 13 per cent higher than one year ago. Much will be revealed by the way the bank manages the money market next week. As one market commentator said yesterday: "Tuesday morning will tell a lot."
The Central Bank could, of course, decide to force the issue by increasing its own short term facility rate. However the financial institutions will eventually move their own rates upwards if money market rates do not ease, with or without a move from the Central Bank. A modest increase in interest rates would not have a significant impact on the economy growth is buoyant and both consumer spending and business investment are rising at a healthy rate. The manufacturing sector remains strong, although some companies are affected by the strength of the pound against sterling on the foreign exchange markets.
One of the few indicators which has not improved in recent months is the live register of unemployment, which increased again last month. There are legitimate questions about the validity of this measure and how it is being affected by administrative changes and increases in part time working. The Government is correct to seek another more regular measure by including questions about employment in a new quarterly household survey.
However the live register figures cannot be dismissed entirely. With the population growing and more people coming onto the jobs market, it is quite possible that employment and unemployment are both rising at the same time. It is remiss of the Government not to have investigated more thoroughly the reasons behind the live register rise.
The rising unemployment register and trends on the money markets, show that the Government cannot afford to rest on its economic laurels. Currency and interest rate policy is becoming more difficult, as the Government and the Central Bank strive to achieve the often conflicting goals of maintaining a stable currency in the ERM, ensuring the pound does not rise too rapidly against sterling and controlling inflation. Meanwhile much remains to be done in areas such as tax reform to boost job creation and tackle unemployment. With economic performance next year counting towards qualification for economic and monetary union and an election due the Government could face some tricky policy choices in the months ahead.