Click to follow
The Independent Online
THE POUND is seen little changed against the euro this week amid expectations that the Bank of England may add to its string of interest rate cuts if sterling doesn't weaken soon.

"Even a rate cut won't take the shine off the pound," said Gerard Lyons, the chief economist at DKB International. "It's going to remain pretty solid."

With the euro zone's benchmark rate at 2.5 per cent - less than half of the 5.25 per cent rate in the U.K. - the bigger returns on sterling deposits will keep attracting investors even with the prospect of another cut in interest rates.

Friday, the pound was little changed at 0.6594 pound per euro from 0.6573 on Thursday, holding on to its 6.4 per cent gain this year. Traders were undaunted by warnings from UK central bankers that sterling strength may spur more rate cuts. Against the dollar, the pound was little changed at $1.6177, compared with $1.6187 on Thursday.

Sterling has risen 4.8 per cent against the currencies of its major trading partners since the start of the year, making UK products more expensive to shoppers abroad. A strong pound also translates into cheaper imported goods, pulling down inflation. That's stirred the concern of the Bank of England, whose mandate is to keep inflation to a 2.5 per cent annual pace.

April inflation figures are due on Tuesday. Economists predict that the rate will undershoot the target at 2.4 per cent. Inflation was 2.7 per cent in March, padded by tax increases introduced in the latest budget.

"The bottom line is that the MPC has to try and meet its inflation target," said David Brickman, an economist at PaineWebber International. "At the moment, a strong pound means that base rates will probably have to fall."

The Bank of England said in its quarterly inflation report, released on Wednesday, that it may have to cut interest rates again if sterling doesn't depreciate soon. The central bank lowered rates at six of its past eight meetings, chopping 225 basis points off the securities repurchase rate.

The BOE already voiced concern about the pound last week after it announced its decision to leave its key rate untouched. The bank cautioned then it might cut rates again if the pound doesn't weaken.

"Sterling looks increasingly likely to force the Bank's hand," said Patrick Perret-Green, a trader at United Bank of Kuwait.

UK economists are split on whether the Bank of England's Monetary Policy Committee will cut rates in June. Nine of 17 economists surveyed by Bloomberg News predict the MPC will keep the rate unchanged, while the rest forecast a 25 basis-point cut.

That would take the repurchase rate to its lowest level in 22 years.

"Clearly the central bank would like to see sterling go down," said Ryan Shea, an economist at First Chicago Bank. "We think they will cut another 25 basis points in the coming months."

How effective recent cuts have been in promoting an economic recovery should be revealed in reports this week on unemployment and wage growth released Wednesday, the same day the Bank of England published the minutes from its May meeting.