Pound exposed by rates surprise

THE pound and French franc are expected to come under pressure when the foreign exchange markets re-open in Asia at midnight, in the wake of today's French presidential election and Friday's decision by the Chancellor of the Exchequer, Kenneth Clarke, to leave interest rates unchanged.

Mr Clarke's comments on this morning's Frost on Sunday BBC television programme will be carefully analysed for an explanation of his interest- rate decision, despite rising raw material costs, an already weak pound and surging money market rates.

The suspicion is gaining ground that Mr Clarke is preparing to relax the chains that have been holding inflation back, which would imply a potentially damaging disagreement with Eddie George, the Governor of the Bank of England.

Said one dealer: "Clarke has some explaining to do. If sterling continues to fall this week, he is going to look pretty stupid if he has to shore it up with an increase in base rate by Friday."

Sterling will share the spotlight this week with the French franc, as markets react to the result of the French presidential election. If Jacques Chirac should be defeated today by the Socialist candidate, Lionel Jospin, the franc would go into free-fall.

Speculation surrounding the two European currencies should take some of the heat off the US dollar, which has been pulling the pound down with it.

Pressure for a further rise in UK base rates has been generated by the currency and bond markets and is unlikely to disappear quickly. Headline inflation, including mortgage interest, has edged up in the past few months to 3.5 per cent and the underlying rate has reached 2.8 per cent, mainly because of the rise in commodity prices and the decline in the value of the pound against the mark, yen and Swiss franc.

Some economists argue that the case for a rise in rates to control domestic demand was weak and has weakened further since the last increase three months ago, as the growth of output and consumption has visibly decelerated.

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