THE pound is expected to hold this year's 5 per cent gain against the euro this week on speculation that UK growth prospects are better than those of the euro 11 region.

"The outlook for the UK is improving more quickly than for continental Europe," said Ian Stewart, an economist at Merrill Lynch. He expects the Bank of England will cut the repurchase rate to 5.0 per cent by the middle of the year, from 5.5 per cent currently.

Bank of England policy makers have sliced 2 percentage points off the benchmark lending rate in the past six months, driving it down to 5.5 per cent, in a bid to keep the economy growing. The European Central Bank, meanwhile, opted to leave its refinancing rate at 3.0 per cent at each of its six meetings since the common currency was introduced.

On Friday, the pound rose to 0.6710 per euro from 0.6744 late Thursday. It was little changed against the dollar at $1.6267 from $1.6309. It has fallen 1.5 per cent against the US currency this year on the expectation that the interest rate differential between pound and dollar deposits would narrow.

Investors said the strength of the pound makes it more likely the Bank of England will cut rates further this year, since it hurts exporters by making their products more expensive. It also helps curb inflation by making imports cheaper.

Whisky exporters are feeling the strain. The Scotch Whisky Association said last week that exports slipped 15 per cent in 1998, because of the pound's strength and the slowdown in emerging market economies. "There is no surprise in these figures, nor complacency in the industry," said its, director-general, Hugh Morrison.

"The MPC will continue to ease because the economy is still in poor shape and the pound is too strong for industry," said Rod Davidson, at Murray Johnstone Asset Management. "We'll definitely see a quarter point, and maybe even a half point, off [rates] in April."

More clues on the state of the British economy and the outlook for rate cuts will come in reports on inflation and trade. Economists expect a report on Tuesday to show the Government's preferred measure of inflation - the rise in retail prices minus mortgage interest payments - rose 2.5 per cent in February, in line with the central bank's target.

A report on Thursday will probably show that the UK's trade gap with the rest of the world grew to pounds 2.6bn in January from pounds 2.2bn the previous month.

Sterling interest-rate futures contracts that settle in June suggest traders and investors anticipate three-month lending rates to fall to 5.08 per cent by then. That's far enough below current lending rates of 5.36 per cent to suggest expectations for a quarter-point cut by mid-year.

The Bank of England's rate-setting committee next meets on 7 and 8 April.

The dollar rose on Thursday and Friday against the euro on expectations that the ECB's policy of keeping rates unchanged is postponing an economic rebound in the euro-zone. "Europe is sitting on the sidelines", and that's hindering a rebound in the euro, said Laura Zimmerman, global bond strategist at Payden & Rygel in Los Angeles. "The ECB has the room to cut, it has the flexibility and inflation is low enough."