The pound has fallen by more than two pfennigs in the past week, closing on Friday at DM2.8752. It has been dragged down by a weaker dollar, pessimism about economic recovery and the growing conviction that the Maastricht treaty on economic and monetary union is dead.
Sterling faces a new hurdle on Thursday when the Bundesbank council meets to consider whether the growth of the German money supply warrants a further rise in the discount rate. Some of the council's anti-inflation hawks have been reported as pressing for a rise.
The Chancellor has never cut interest rates with the pound trading so low within its 6 per cent limits around the DM2.95 central target rate, and on Friday Norman Lamont poured scorn on the argument that British interest rates could be cut much below German ones.
'I know of no serious economic commentator or analyst who believes that sharp interest rate cuts - from our current position, with rates just above those in Germany - are a serious option within the ERM,' he said.
Even Friday's unexpectedly sharp fall in the inflation figures - from 4.3 to 3.9 per cent in June - failed to persuade the money market that the next move in interest rates was more likely to be down than up, which it had been forecasting a week earlier.
'Although the lower (inflation) rate is in line with government targets, it does not imply any early reduction in UK interest rates,' economists at Nikko Bank said. Simon Briscoe, of Midland Montagu, said although the fall in inflation was 'quite striking' an early cut in base rates was not in prospect.
Calls for interest rate cuts have been growing, not least from Baroness Thatcher, who also called for a 'realignment' in a private speech. But Mr Lamont disparaged suggestions that the pound should be devalued, lowering the bands within which it can vary in the ERM.
The Treasury's unpublished June forecast confirms that economic prospects are much worse than they appeared at the time of the Budget. Treasury officials expect national output this year to be down on 1991, while their more gloomy analyses suggest that the recovery may not even have started by the end of the year.
This prognosis is reflected in the Independent-Oxford activity indicator, which uses business statistics to provide weekly snapshots of the strength of the economy. Last week saw the fifth successive fall. Figures for factory output, due this week, will be scrutinised for evidence that the recovery in manufacturing industry since February might be tailing off as high street spending remains subdued.
However, there was some good news from the retail sector at the weekend, with the John Lewis Partnership reporting the strongest week's trade in its department stores for two months.Reuse content