Smaller companies do not expect the strong pound to harm their export prospects

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The Independent Online
Small and medium sized companies do not think the strong pound will harm their export prospects, a new survey indicates. It coincides with a prediction that the Bank of England will have to raise interest rates more than its recent Inflation Report hinted because it is wrong to assume exports and growth will slow quickly.

The survey, by investment group 3i, found that small and medium sized companies are confident about their export prospects. According to 3i: "This picture is consistent with the Bank of England's Inflation Report ... which noted that there had been little reduction in the volume of British exports since August 1996 despite sterling's appreciation of around 20 per cent."

Brian Larcombe, chief executive of 3i, said: "It is encouraging to see these businesses resilient in the face of a strong pound, though it is difficult to say at this stage whether we have yet seen the full impact of stronger sterling."

The judgment that the strong currency would now start to bite lay behind the Bank's prediction of a sharp slowdown in growth in the early part of next year. This forecast - published for the first time in the latest Inflation Report - allowed the Bank to predict a favourable outlook of inflation staying on target for the next two years.

However, a report published today by the investment bank Lehman Brothers says the Bank of England forecast is implausible. Economist Michael Dicks said the Bank's outlook implied that the economy would slow from growing at a pace double its long-run potential to well under half its potential in the space of six months.

He predicts a much gentler slowdown, implying that for the next one or two quarters the economy will grow at a pace far faster than the Bank has assumed.

Mr Dicks said: "Unless growth does slow abruptly next year, the Bank will have to tighten the monetary stance, perhaps appreciably. Otherwise it will miss its inflation target." Interest rates would climb to 8 per cent in the summer from their current level of 7.25 per cent, he predicted, with the next increase occurring as early as January or February 1998.

The 3i survey lends some support to the argument that growth will not slow that sharply. The survey found that significantly more companies expected to increase rather than decrease the value of their exports over the coming 12 months.