"Everyone knows we're flirting with recession in the first half," said Neil Ellerbeck, at Chase Asset Management. "Inflation is no problem. We need a more stimulatory policy." He expects a quarter point cut next month.
Friday, the pound fell to $1.6209 and rose to 0.6622 pound per euro. The military conflict in Yugoslavia carried sterling to its highest yet against the euro and extended its gain so far this year to 6.1 per cent. The pound could decline further against the dollar if conflict in the region intensifies. The dollar rose against major currencies on Friday as Nato began its third day of air strikes. Tension escalated as Russia said it would expel Nato's representative in Moscow in protest. The dollar was bought by investors looking for a safe haven.
The Bank of England has slashed 2 percentage points from rates in the past six months, driving it to 5.5 per cent to enliven growth. The bank's rate-setting Monetary Policy Committee next meets on 7 and 8 April. Sterling hasn't flinched in the face of rate cuts. Though lower rates usually weaken a currency, the pound has gained as the Bank of England's measures are seen guiding the economy towards recovery. Cuts totalling 125 basis points in the fourth quarter helped the economy expand 0.1 per cent from the previous three-month period. In Germany, where one move in December cut rates 30 basis points, the economy shrank 0.4 per cent.
"Even though the Bank of England will cut rates, I don't see the pound fluttering," said Gerard Lyons, the chief economist at DKB International.
"Interest rate cuts themselves are positive for the economy," he added.
A staunch pound is causing problems for exporters, whose products become more expensive on world markets as the currency appreciates. On Thursday, a survey by the CBI showed manufacturing is still in recession as export orders declined. A report on Wednesday showed the overall trade deficit widened in January to a record pounds 2.8bn.
On Tuesday, annual retail prices minus mortgage interest payments came in at a 2.4 per cent gain in the year ended in February, the slowest pace since November 1994 and below the government's 2.5 per cent target.
"Inflation is quite good and the numbers may go down," said Henrich Maass, an economist at Westdeutsche Landesbank Girozentrale in Frankfurt. "That means the MPC has room for lower interest rates."
This week, reports could show a drop in consumer borrowing and smaller increases in money supply, underlining the need for further easing. Both reports are due on Monday at 9.30am. Net consumer credit probably fell to pounds 1.08bn in February from 1.38bn.
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