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Investment view

Judging whether the Bank of England&#39s monetary policy committee was likely to vary UK interest rates last week was one of the easier calls to make. Reuters polled no fewer than 42 economists ahead of the announcement and, without exception, they expected the MPC to leave interest rates unchanged. But deciding when the next movement in interest rates will be – and whether it will be a rise or a fall – is more difficult.

The more robust economic data that has been arriving on analysts&#39 desks recently has led to speculation that the MPC&#39s decision last month was the wrong one. Certainly, it came as a surprise. It was the first meeting to take place under the chairmanship of Mervyn King and few thought he would wish to see a change in rates take place so early in his tenure. We now know that it was a majority decision, even if there was only one dissenter.

Subsequently, we have seen retail sales and consumer credit numbers coming in better than expected while the purchasing managers&#39 indices are showing a useful rise in confidence. From fearing that the UK will be dragged down by the sluggish performance of continental European economies and a reining back of public expenditure, the picture has brightened. You cannot help but wonder if the MPC would have moved in August if it had left rates unchanged in July.

It is not just in the UK that we are seeing more encouraging news. US GDP for the second quarter came in better than expected. Moreover, a survey conducted recently by Goldman Sachs of US chief executive officers suggested that they are growing in confidence and are more likely to resume capital spending than at any time since the bubble burst. It is a move of this nature that the Federal Reserve Bank has been hoping for and trying to encourage through monetary loosening.

Confidence surveys are a snapshot in time but they can give investors a useful steer. In this particular exercise, we learned that it is not just in the field of capital expenditure that CEOs are becoming more positive. The research, carried out by Jim O&#39Neill, suggested that merger and acquisition activity is likely to increase, too. The findings of this July poll were a notable improvement on an earlier survey carried out in April.

Of course, by July, company bosses would have a good feel for how the first half of this year was turning out. By and large, it has been a good results&#39 reporting season. Surprises have been on the upside. Indeed, it must be an indication of how expectations are being ratcheted up when Royal Bank of Scotland&#39s shares declined on the very morning it delivered an impressive set of results.

One can only assume that investors are now so used to companies reporting better than expected numbers that when RBS did no more than deliver the anticipated good news, they were disappointed.

The roll call of those who consider we are in a new bull market continues to widen. I learned recently that the wily old chartist, Brian Marber, has joined this throng. There are certainly more smiles around in the Square Mile these days but the worry remains that something could damage the confident tone that is building. Geopolitical concerns, such as terrorist attacks, are difficult to predict but the growing debt burden in the US and the UK is a genuine and measurable worry. Even Barclays has criticised the practice of rival banks, where striking crazy deals to encourage borrowing has been commonplace.

But there are encouraging signs even here. In the US, the continuing high level of unemployment is leading to more caution among consumers. President George Bush&#39s tax cuts are taking over from borrowing as the driver for spending but even some of these gains are being saved. Moreover, the rise in longer-term rates is beginning to act as a brake on borrowing – something that could happen here as the very special deals that have been around start to dry up.

Just as I am not complaining about the weather this summer, so I plan to keep quiet as the evidence for better economic and market conditions continues to build, little by little. Long may it continue.


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