UK plays dangerous game of boom and bust simultaneously

Sterling's fortunes may have turned the corner, after a succession of figures indicating rising British inflationary pressures. Economists are now increasingly convinced that British rate rises are on the way.

After the deluge of condemnation following the recent Bank of England quarter-point rate rise, economists are having to admit the central bankers were right.

Sterling is now well supported and could be heading towards DM3.0 again. This will push the pound down against the strengthening British currency.

Retail sales data yesterday were the latest of a series of indicators showing that Britain is facing into an unhealthy mixture of low growth, spiralling prices and possibly growing unemployment but yet more interest rate rises.

The figures showed that high-street sales rose by 1.7 per cent in May from April and by 4.6 per cent on an annual comparison. The surprise results were far higher than predicted 0.3 per cent and 3.3 per cent respectively

and turned far weaker figures for April on their head.

As a result sterling climbed yesterday to DM2.9940 from DM2.9691 and the pound fell to 84.19p sterling from 84.77p.

Inflation reached its highest level in six years in May, at an annual rate of 4.2 per cent, or 3.2 on an underlying basis excluding mortgage rate rises.

Unemployment is also rising, albeit by a very small amount. This week, the numbers signing on rose 1,700 the first rise in two years. This squares with other indicators pointing to a slowdown in the manufacturing and, possibly, the services areas.

Mr Jim Power, chief economist at Bank of Ireland, said Bank of England governor, Mr Eddie George, admitted he made a mistake by voting against a rate increase at the beginning of the year. "That guarantees at least one if not two more rate rises," he said.

However, while the strong medicine of rate rises may nip inflation in the bud, it may also plunge Britain into recession.

High interest rates are said to be responsible for the soaring value of sterling and the moribund state of Britain's manufacturing and export sectors.

The Conservative Party's spokesman on the economy, Mr David Heathcoat-Amory, said the situation "confirms our warnings that the British economy is experiencing boom and bust together at the same time".