By Perri Colley McKinney

The pound is expected to rally next week, paring the 20-pfennig drop it has made against the mark in the past six weeks as reports show retail sales and inflation accelerating. However, analysts said that any gains are likely to prove short-lived. Only six of 29 economists in a survey expect UK interest rates to be higher than their current 7.25 per cent level by the year-end, meaning the return on sterling money-market deposits won't rise.

"The market is looking for strong numbers next week," said Adrian Cunningham, director of economics at Scottish Mutual Portfolio Managers. "We could see a bounce in the pound, but the market will take it as an opportunity to sell."

The pound was trading at its lowest since December last week at DM2.9042, down from a nine-year high of 3.1102 which it reached on 31 March. Against the dollar, it was at $1.6303.

The currency's gains since August 1996 are now down to 23 per cent as investors become convinced rates don't need to go up to control inflation. The Bank of England said in its quarterly inflation report last week that it is more confident that inflation will slow to the Government's target.

"Expectations of a rate rise had been boosting sterling, but the market is now convinced rates have peaked," said Ian Amstad, a senior economist at Banker's Trust International.