Market Preview: Data releases are unlikely to ease interest rate concerns

British homeowners are wondering just how much further their mortgage payments will rise after the Bank of England’s surprise decision to raise interest rates to 5.25 per cent. This week’s data releases are likely to provide little comfort.

John Butler, analyst at HSBC, noted a significant change of tone in the statement accompanying the rate rise and says this was likely to reflect the Bank’s concerns about underlying inflation rising more quickly than anticipated. The minutes from the Bank’s January meeting, due on Wednesday, should make policymakers’ thinking clearer.

Albert Edwards, strategist at Dresdner Kleinwort, questions whether the rate rise was necessary as core inflation remains muted. Recognising that policymakers are trying to anchor future wage settlements, Mr Edwards says: “At a time when profit margins are at record levels, it is labour rather than capital that the government wants to take the hit from higher costs of living …(but) it seems unlikely that labour will lie flat on its back and accept this situation.”

The initial estimate for UK gross domestic product growth in the fourth quarter is also due on Wednesday. The consensus forecast is for an increase of 0.7 per cent, which would leave year-on-year growth unchanged at 2.9 per cent. However, service sector activity is at a 10-year high, so economic growth may have accelerated in the final three months of 2006. This would underline market concerns that interest rates have further to rise, possibly to 5.75 per cent.

Policymakers will have new forecasts on inflation and growth to consider at the Bank’s next meeting in February. The current consensus is for the UK economy to grow by 2.4 per cent this year, with inflation averaging 2.2 per cent, running above target in the first half of 2007. However, Michael Saunders of Citigroup says higher investment spending, strong global growth and continued immigration flows could push growth up to 2.9 per cent this year.

One offsetting factor in the decision about whether to raise interest rates is the high level of sterling – trading at about a 10-year high on a trade-weighted basis – and an key factor in the Bank’s deliberations. Sterling’s strength is likely to hurt manufacturing exports and may be reflected in the CBI’s Industrial Trends survey for January, due on Monday, with a fall in the total orders balance likely.

The German Ifo business climate survey for January, due on Thursday, is expected to rise from 108.7 in December to 109.0 as fears about the impact on the increase in value-added tax this quarter have eased. The VAT increase would boost inflation by about 1.4 percentage points if fully passed on.

However, an offset is being provided by lower oil prices, so German inflation for January is expected to rise from 1.4 per cent in December to 2.5 per cent. The full impact of the VAT rise on consumers will not be clear for some time. Households brought forward spending anticipating the tax rise so a correction in furniture and car sales is expected in the first quarter.

In the US, the housing market appears to have shown signs of stabilising. On Thursday, existing home sales are expected to edge lower, from 6.28m (annualised) in November to 6.25m in December. New home sales, due on Friday, are expected to be slightly higher at 1.05m as mortgage applications have risen recently.

Friday brings durable goods orders for December. The headline figure will be boosted by a huge spike in Boeing aircraft orders. Analysts prefer to look at the core measure - non-defence capital goods excluding aircraft - as a guide for investment spending. This measure rose 6.3 per cent year-on-year in November but the trend appears to be cooling.