Homes and inflation give pound rough ride

Official figures showed inflation soared to a 13-month high of 3% last month from 2.5% in March - all but slamming the door on a cut in interest rates next month. It came after warnings from housebuilders Redrow and Galliford Try of a dramatic slump in sales in recent weeks.

Redrow said reservations so far this year were down 50% while Galliford said conditions "have been difficult throughout the spring selling season", and warned profits will be lower than expected.

The alerts added to the housing market gloom following yet more bad news from property surveyors, who said prices are falling across the country and confidence is at its lowest for 30 years.

Sterling initially spiked after the inflation figures were released as traders bet the Bank of England will leave interest rates on hold.

It soon gave up its gains and sank to a three-month low against the dollar - down 1.37 cents to $1.9483 - on concerns about the outlook for the economy.

Neil Mellor, currency strategist at Bank of New York Mellon, said: "Although the pound did initially rally sharply following the publication of the number, its gains began to be eroded very quickly as investors absorbed the broader negative economic implications of this."

Gavin Friend, head of foreign exchange at Commerzbank, said the early rally by the pound was "a kneejerk reaction" to the shocking inflation figures.

He said that although Britain was a long way from "stagflation" - no economic growth and rising inflation - it was now suffering "slugflation" - slower growth and rising inflation.

The economic slowdown is being particularly felt in the housing market. Redrow chief executive Neil Fitzsimmons said trading conditions were now even worse than he had forecast in late February because mortgage lending has all but dried up.

Cancellation rates are on the rise with a "marked increase" since Easter when they were running at "just over 20%". Fitzsimmons predicted legal completions for the year to be down 20% compared with earlier estimates of 10%. Redrow shares tumbled 183/4p to 274p.

Galliford forecast profits for the year to end-June to be "no less" than £60 million, against £60.2 million last year and market forecasts of nearly £80 million. The shares fell 23/4p to 551/4p.

THE STORY SO FAR
27 February - Barratt Developments says that house sales are down 7%

17 April - Taylor Wimpey says sales "significantly below" 2007

24 April - Persimmon reports that sales are down by 24%

6 May - Bovis Homes says reservations for new homes are down by 30%

13 May - Redrow says its reservations are 50% lower than at this time last year

13 May - Galliford Try reports there has been no spring bounce