City investors predict UK will join euro early

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The Independent Online
A new survey of fund managers revealed that three-quarters of them reckon Britain will join the single currency before 2002. This suggests the financial markets have already started making the adjustments necessary for UK membership, says Diane Coyle, Economics Editor.

Only one in 10 of the UK-based investors covered by Merrill Lynch's regular survey said they believe Britain will never join the European single currency. Fully 76 per cent think the UK will be in from 2001 or 2002, before the end of the current Parliament.

This surprising degree of consensus has emerged after a leak of the Government's intention to take a more positive approach towards membership of Europe's economic and monetary union. This lopped several pfennigs off the pound's exchange rate against the German mark at the end of last month and took gilt yields much closer to low German yields.

Bijhal Shah, global strategist at Merrill Lynch, said: "Given that the vast majority of managers expect the UK to join EMU, much of the convergence in yields between UK gilts and German Bunds may already have occurred."

The pound climbed a little on the foreign exchanges yesterday because of disappointing figures on producer prices. Even so, it ended at DM2.84, still well below its level of DM2.87 two weeks ago.

The latest official figures for prices paid by manufacturers for their raw materials, and charged at the factory gate, were described as "disappointing" by City analysts.

Input prices increased 0.5 per cent last month, and the year-on-year rate at which they are falling was 7.8 per cent compared with 8.3 per cent in August. Output prices rose 0.2 per cent in September, to a level only 1.4 per cent higher than a year earlier. Underlying prices, excluding energy, food, drink and tobacco, rose 0.1 per cent in the month and 0.8 per cent year on year.

This showed inflation at the start of the chain to be tame but not quite as subdued as expected. In particular, food prices are showing signs of an inflationary pick-up.

But with manufacturing lagging behind the rest of the economy, prices charged for services and wages present a greater cause for concern. "The unemployment and earnings data due this week will be much more important for the path of base rates," said Adam Cole of James Capel.

A survey of high street sales by the British Retail Consortium showed a sharp dip in sales growth last month. The BRC said the funeral of Diana, Princess of Wales had reduced sales by an estimated pounds 230m, but it said spending had begun to slow even allowing for this. On a "like-for-like" basis, adjusted sales were up at an annual rate of 3.4 per cent compared with 3.9 per cent in August.