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The Independent Online
THE pound may rise against the euro this week on speculation that signs of an economic rebound will persuade the Bank of England it doesn't need to change monetary policy.

"We're not standing on the parapet screaming for [rates] to come down further," said David Thomas, senior economist at ICI. "Whereas two or three months ago we were looking at zero per cent growth or below, we're now looking for a modest increase."

On Friday, the pound climbed as high as 0.6603 against the euro, its strongest since the euro's introduction in January , and extended its gains against the single currency to 6 per cent this year. It was little changed at $1.6118 from $1.6104.

"Sterling continues to surprise a lot of people with the way it's performing, and it should remain well supported for a while," said Alan Wilde, head of fixed-income at Scottish Mutual. "The worry about a recession seems to be fading."

The Bank of England has already cut interest rates to 5.25 per cent from 7.50 per cent in the past seven months. If rates don't fall much further that's good news for the pound because sterling deposits will keep their lucrative yield. Three-month pound deposits return about 30 basis points more than dollar deposits and about 260 basis points more than euro deposits.

Economists are split over whether the Monetary Policy Committee will lower rates when it next meets on 5 and 6 May. Eight out of 15 analysts expect rates will stay unchanged, while seven said the bank will trim by another 25 basis points.

There are several official reports this week on producer price inflation, inflation, unemployment and wages, money supply, retail sales and the Government's first estimate of economic growth in the first quarter. Economic growth is expected to be 0.1 per cent in the first quarter from the final three months of 1998 - the same rate of growth as in the fourth quarter. The report is due on Friday.

The Bank of England's rate cuts have brightened the outlook for growth. Eighty-three per cent of UK asset managers surveyed by Merrill Lynch at the start of April expect a stronger economy in a year's time, compared with a record low of 3 per cent in September.

Tuesday's inflation report, meanwhile, is expected to show the underlying rate rose an annual 2.8 per cent in March, just above the Government's 2.5 per cent target.

The pound is likely to be underpinned against the euro over the next few weeks amid speculation that the conflict in Yugoslavia will escalate, threatening to stretch European governments' budgets as the cost of sheltering refugees and the Nato bombing campaign rises. "This looks set to be a fairly drawn out affair that will not only be costly to European governments, but one that could destabilise Eastern Europe as a whole," said James McKay, global markets strategist at Commonwealth Bank of Australia. "We see little reason to be optimistic on the euro."

EU President designate, Romano Prodi, said the cost of the conflict in Yugoslavia could weigh on European growth, though it wasn't yet possible to assess its full impact. Speaking at the Foreign Press Club, Mr Prodi said that growth in the EU was already "not enough" and could lag further "as a consequence of the war".