Markets seek sign of ERM stability

THE CURRENCY markets will be looking for evidence this week that Friday's rise in Italian interest rates and the results of the Bath meeting of EC finance ministers have eased the strains within the European exchange rate mechanism.

Repeated interventions by the Bundesbank, the Belgian central bank and the Bank of Italy, together with a 1.75-percentage point rise in Italian interest rates, have failed to keep the lira above its floor. The markets believe the lira would be the first candidate for devaluation against the mark if a 'no' vote in this month's French referendum on the Maastricht treaty prompts an ERM realignment.

However, Friday's signal of lower US interest rates by the Federal Reserve led City economists to predict that more funds could flow from the beleaguered dollar to the mark this week, putting the ERM under more pressure.

The pound was lifted - for the moment, at least - out of the ERM danger zone by Thursday's announcement that the Treasury is raising pounds 7.25bn of foreign currency to defend it in borrowings from international banks and issues of bills.

The scheme was seen as the most convincing evidence yet that the Government is opposed to a devaluation of sterling, which is expected to form part of any ERM realignment.

The scheme provides a clear incentive to avoid devaluation, because it would raise the cost in sterling of repaying the foreign currency debt.

Strains within the ERM are likely to overshadow the British economic statistics, due out this week. Figures for August inflation are expected to show a slight rise in the annual rate of increase in retail prices to 3.8 per cent, from 3.7 per cent in the year to July.

There is expected to be little evidence of a revival in high- street spending in Monday's consumer credit figures for July.

They are forecast to show that consumers repaid pounds 50m of debt during the month, following a pounds 135m repayment in June.

The latest distributive trades survey from the Confederation of British Industry, due on Thursday, will give an advance indication of the official high street spending figures.

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