Pound 'better out of euro'

Britain's interest rates will fall below euro interest rates if sterling stays out of the single currency, according to a report published tomorrow by the Institute of Directors.

The report argues that as long as the British economy maintains its monetary policy framework to ensure price stability and continues to improve its productivity faster than its Continental neighbours, sterling will gradually appreciate against the euro.

Meanwhile, the European Central Bank, which will be charged with setting euro interest rates, may have to maintain tight monetary policy - high interest rates - to compensate for the initial lack of stability in the single currency caused by ongoing convergence problems from the initial entrants into EMU.

"The European Central Bank will have the eyes of the world's financial markets upon it, and the onus will be on it to prove that it is genuinely a 'son of Bundesbank' with a conservative monetary policy to back it up," said Stephen Davies, the report's author.

He added that if Britain were to join the single currency, its higher productivity growth would condemn it to higher inflation than its European neighbours.