CURRENCIES

Click to follow
The Independent Online
The pound is seen little changed this week ahead of a decision from the Bank of England on whether the economy is weak enough to warrant further easing in interest rates. Five rate cuts in the past six months have whittled the benchmark repurchasing rate to 5.50 per cent. Lacklustre growth and subdued inflation are fanning expectations that a sixth easing is in store when the rate-setting Monetary Policy Committee meets this week.

"The slowdown in the UK economy comes hand-in-hand with an easing of inflationary pressures," said Antoine Brunet, the chief market economist at Credit Commercial de France. He said a quarter-point cut was likely.

On Thursday, the pound fell to $1.6065, down nearly 2 cents in the week. Sterling was little changed at 0.6711 pound per euro, from 0.6693, up 4.6 per cent this year against the EU's currency.

Out of 17 economists in a survey, 15 expect the Bank of England to lower rates to 5.25 per cent when MPC convenes next week. Two expect no change. The bank's recent string of cuts has helped bring some signs of recovery, but the economy needs a boost from even cheaper borrowing.

Reports on Thursday of a slowing deterioration in manufacturing and better retail sales in March were overshadowed by a swelling deficit and sluggish expansion. The Confederation of British Industry said sales at stores and supermarkets increased in March at their fastest pace in six months.

Manufacturing contracted for an 11th consecutive month in March, though the speed of the decline slowed. The Chartered Institute of Purchasing and Supply said its Purchasing Managers Index rose to 47.2 in March from 45.9. Readings below 50 mark a contraction.

"Anything below 50 is recession, that's no reason to hold off from cutting rates," said Sean Callow, a currency analyst at market research firm IDEA. "There are plenty of reasons for another easing." Callow said he expects the Bank of England to trim a quarter point from its benchmark rate this month.

The trade deficit swelled to its largest ever in January at pounds 2.833bn while inflation came in at the slowest pace in four and a half years, showing there's room to trim rates. While lower rates typically undermine a currency by reducing the return on deposits, lower borrowing costs may buoy the pound by improving the outlook for economic growth, analysts said.

The pound has gained 3.2 per cent against the currencies of its major trading partners this year, bumping up the price of UK goods for shoppers abroad.

"Over the last two or three years, the pound has strengthened and taken a significant part of our profit," said Graham Swetman, finance director at Morgan Crucible Company, which makes components for products ranging from power tools to satellite dishes.

Exporters won't find too much comfort in predictions that the pound will weaken to 0.68 pound per euro by the end of June from the current rate, according to a survey of 57 analysts and fund managers. A mid-year value of 68 pence per euro would leave sterling up almost 4 per cent in 1999. The pound is forecast to trade at around $1.61 at the end of the first half.

Comments