Sunday 02 May 1999
The pound climbed as high as $1.6141 on Friday. It also gained against the single European currency, pushing the euro to as low as pounds 0.6555, just above its lowest level yet - pounds 0.6554, reached on Thursday.
It could hold on to those gains as long as expectations for no rate cuts persist, economists said. "Not many people are looking for a cut next week, so sterling will remain firm," said Adam Chester, an economist at Halifax. Still, he said he's among those expecting a rate cut in the bank's 5.25 per cent rate. The bank's rate-setting Monetary Policy Committee wraps up a two-day meeting on 6 May.
A report by the National Institute of Economic and Social Research said on Friday that the economy may grow at a faster rate than previously estimated and inflation could rise next year, limiting the scope for future rate cuts.
Hopes that the economy will perform better than had been forecast, along with recent reports showing rising manufacturing confidence and retail sales, have prompted a growing number of economists to say the central bank's six rate reductions in the last seven months may be all that are needed to put the economy on track. That bodes well for the pound, because steady rates leave intact the money-market return on sterling deposits.
Of 19 economists surveyed by Bloomberg News, 15 expect no rate reduction while four expect a 25 basis-point cut.
A report last week by the Confederation of British Industry showed that the confidence of manufacturers rose in the three months to April, gaining for a second quarter, to its highest level in more than a year. That follows reports last week showing a larger than expected gain in retail sales, and a smaller than expected gain in unemployment.
In another signal that investors and traders aren't as expectant of a rate cut soon, the yield on interest rate futures contracts is at 5.18 per cent, up from 5.02 per cent a month ago. The proximity of that rate to the current three-month lending rate of 5.33 per cent means traders and investors are less certain that the bank will trim its rate before the contract expires in June.
Those who do see a cut point to recent evidence of benign inflation and the strength of the pound, which can hurt manufacturers. "We are getting to the bottom of the interest-rate cycle," said Claudio Piron, an economist at Standard Chartered.
"We're looking for another cut, given the strength of sterling and that the central bank has maintained a doveish tone in the minutes of its last meeting."
The pound is up 7 per cent against the euro since the single currency was introduced at the beginning of the year, and is up 1 per cent against the dollar since dropping to a 19-month low on 6 April. The currency's strength hurts the economy because it increases the price of exports and can trim UK manufacturers' overseas earnings.
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