Click to follow
The Independent Online
THE POUND is little changed this week as investors weigh whether the economy is growing fast enough to keep central bank interest rates on hold. "At the moment, the numbers are quite good," said Gordon Ross, at Chase Asset Management. "You have to suspect the number of rate cuts from here will be small. That should underpin sterling." Still he expects borrowing costs to fall once more this year.

On Friday, the pound fell as low as $1.5675, its weakest level since August 1997. Against the euro, it was at pounds 0.6486, up 8 per cent this year.

The Bank of England meets this week to set interest rates. In June, eight of the nine members of the bank's Monetary Policy Committee voted to cut by a quarter point, taking the benchmark rate to a 22-year low of 5.0 per cent. Signs that economic growth is gathering speed could convince policy-makers to leave rates on hold this month.

All of 15 economists surveyed last week said there would be no change. "Sterling will remain solid," said David Coleman, CIBC World Markets' chief economist. "The economy seems to be picking up."

On Thursday, reports showed sales at UK stores and supermarkets last month grew at their fastest annual rate for a year, while manufacturing expanded in June for the first time in 15 months.

"I don't think the Bank of England needs to cut rates again," said Lee Ferridge, who is head of global currency strategy at Rabobank International. Economists expect rates to remain at 5.0 per cent through the end of the third quarter.

Some economists still see rates falling, though. Salomon Smith Barney, Lehman Brothers and Credit Lyonnais all predict a drop to 4.75 per cent.

The Bank of England may have to cut rates again to prevent the pound, which is up 4.8 per cent versus the currencies of the UK's major trading partners this year, from jeopardising the inflation target set by the Government.

"We're not competitive against the euro," said CIBC's Coleman. "If it persists - euro weakness and sterling strength - you can't rule out another rate cut."

"Sterling will be an important part of further base rate cuts," said Steve Barrow, a currency strategist at Bear Stearns International. "The BoE has no choice - it has to hit the target."

Meanwhile, the US Federal Reserve raised its benchmark rate 25 basis points to 5.0 per cent Wednesday, putting official rates in the US and UK at the same level for now. The pound could lose value against the dollar if signs emerge of an overheating US economy that could push the Fed to lift rates again to rein in inflation.

"Interest rate and growth differentials favour the dollar vis-a-vis the euro for the time being, and sterling should be dragged up in the dollar's wake," said Mark Wall, a Deutsche Bank economist. "That could make a UK rate cut more likely," but he thinks rates will hold at the July meeting.

Reports on manufacturing and industrial production due Tuesday are likely to show that industrial production rose 0.1 per cent in May, the same pace recorded in April. May manufacturing production probably rose 0.1 per cent after being unchanged in April. Also on Tuesday, the British Retail Consortium publishes its retail sales monitor for June.