CURRENCIES

THE POUND is expected to gain in the coming days amid evidence that the UK's economic recovery is accelerating without producing much inflation.

Figures last week showed falling unemployment and rising retail sales, while the Bank of England said it expected growth to quicken in the coming months, cementing expectations interest rates would not be lowered in the near future. A report this week is likely to show further retail sales growth.

"We may not be faced with further cuts in interest rates, and recent numbers signal a pickup in UK growth," said Uwe Fuehrer, head of currency sales at Credit Agricole Indosuez. The pound "will continue to have a strong performance".

The pound rose 1.3 per cent against the euro last week, rising to 65.86p per euro. Against the dollar, it declined 0.2 per cent for the week to $1.6059.

The central bank indicated on Wednesday that growth would accelerate in the next two years more than it previously expected, saying the economy could expand 2 per cent by the end of this year and 3 per cent in 2001. Previously the central bank had been forecasting a growth rate of about 1 per cent for this year.

Other figures showed sales in British shops and supermarkets rose 0.8 per cent in July from a year ago as good weather boosted demand for summer merchandise. Also, the number of people out of jobs dropped in July by a larger than expected margin, driving the unemployment rate to its lowest level in 19 years.

"We expect recovery to continue in the UK," said Michael Rottman, a currency strategist at HypoVereinsbank in Munich. The pound could rise to as high as $1.625 in the coming weeks, he said.

A separate measure of retail sales, slated for release on Wednesday, is expected to show that sales rose 0.5 per cent in July after holding steady the previous month, according to economists.

The report "has some potential to put upside pressure on the pound", said Ian Gunner, a currency strategist at ABN Amro. The pound could rise to $1.629 in the coming days, he said.

The absence of rate cuts means the money-market return on sterling deposits won't fall further. Three-month sterling deposits offer investors 23 basis points fewer than dollar deposits, while they offer 250 basis points more than euro deposits.

Some investors and strategists said economic growth is accelerating enough to prompt the central bank to raise interest rates in the coming months; a move that would make sterling deposits more alluring.

"With the underlying statistics being stronger, the next move in interest rates will be up [some time later this year]," said Stuart Kinnersley, who helps to oversee $4bn as chief investment officer at Nikko Global Asset Management.

Still, figures showing that inflation remains at bay augur steady rates for the time being, economists said. The central bank said on Wednesday that it expected the inflation rate to remain below its target in the next 12 months.

A report on Tuesday is likely to indicate that the retail price index minus mortgage interest payments, the Government's chief inflation yardstick, was unchanged at 2.2 per cent in July, according to economists.

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