CURRENCIES

THE pound is expected to hold last week's 1 per cent gain against the euro - hovering near a record high - as the outlook for United Kingdom growth improves while economic activity stalls in the key economies of the euro region.

The pound has risen 11 per cent against the euro this year, even as the Bank of England trimmed interest rates. Worse than expected growth in the euro region and concern that the war in Yugoslavia will swell euro nations' budget deficits have eroded the value of the five-month old common currency. "Sterling will remain strong," said Adam Chester, an economist at Halifax. "What's driving sterling higher are the problems facing the euro. Five months in and it's all gone wrong."

On Friday, the pound climbed as high as 0.6401 per euro, equivalent to about DM3.05, its highest since April 1998. Against the dollar the pound was little changed at $1.6065.

The Bank of England's Monetary Policy Committee (MPC) meets for its monthly interest rate decision on Wednesday and Thursday, and a decision to leave the benchmark interest rate unchanged at 5.25 per cent could further buoy the pound.

Unchanged rates mean the pound keeps its lucrative return. Three-month pound deposits currently return about 24 basis points more than dollar deposits and 270 basis points more than euro deposits.

Signs that the UK is rebounding may persuade the policy makers to leave rates unchanged. Reports last week have shown the bank's 2.25 percentage points of rate cuts in the last eight months are helping to boost growth, with house prices rising, optimism about retail sales improving, and service industry activity picking up.

Thirteen of 17 economists surveyed said policy makers at the central bank will keep rates on hold. Four said the bank will cut the benchmark rate to 5.00 per cent.

In one sign that investors increasingly expect the Bank of England to leave rates untouched, the implied yield on the September short sterling futures contract has risen about 7 basis points in the past week. It anticipates three-month rates at 5.27 per cent in September, close enough to current rates of 5.38 per cent to suggest few investors expect rates to fall. "Our view is for no change," said Sean Shepley, a strategist at Credit Suisse First Boston. "We've had further signs of growth."

More details on the state of the economy will come as the British Retail Consortium releases its retail sales survey for May on Tuesday, and the Government releases its report on manufacturing and overall industrial production on Wednesday. These figures are expected to show that industrial production and manufacturing production rose 0.2 per cent in April from the previous month.

Still, even as optimism about growth improves, the central bank may trim rates to keep inflation on target. The pound's strength threatens to knock inflation - as measured by the rise in retail prices minus mortgage interest payments - off the Government's 2.5 percent goal.

The vote of Sushil Wadhwani, who will attends his first MPC meeting since replacing Alan Budd, increases the likelihood of a rate cut as he's seen as favouring lower rates to keep inflation on track. Thursday's decision "will be finely balanced", said Mr Chester at Halifax.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Lou Reed distorted the truth about his upbringing, and since his death in 2013, biographers and memoirists have added to the myths
musicThe truth about Lou Reed's upbringing beyond the biographers' and memoirists' myths
News
people
News
Ed Miliband received a warm welcome in Chester
election 2015
Life and Style
Apple CEO Tim Cook announces the Apple Watch during an Apple special even
fashionIs the Apple Watch for you? Well, it depends if you want it for the fitness tech, or for the style
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own