Fading rate cut hopes hit euro and lift pound

Dampened hopes of a sixth successive cut in British interest rates helped send the pound surging against a beleaguered euro on the foreign exchanges yesterday.

The two-month-old single currency fell sharply against the pound and stood at its lowest point yet against the US dollar as dealers braced themselves for higher American borrowing costs and a move from the European Central Bank to boost Euroland's flagging growth prospects.

With UK figures suggesting the recession in manufacturing has bottomed out, the euro was down from 0.6868 to the pound to 0.6788. Measured against the German mark, the pound was up by three pfennigs to close at almost Dm2.89.

Traders said sterling's strength reflected the diminishing expectations of a cut in rates when the Bank of England's monetary policy committee ends its two days of deliberations tomorrow.

Although the strength of sterling will intensify the squeeze on British exporters, a survey yesterday from the Chartered Institute of Purchasing and Supply showed that the five cuts in interest rates since October may be starting to feed through into a slightly stronger demand for factory goods.

The Cips said that there was some evidence that domestic demand was beginning to pick up, even though the snapshot of industry showed manufacturing in recession for the 11th successive month. 'Despite a continued decline in manufacturing output, orders, employment and purchases, there are signs that the tide is beginning to turn, with further evidence of stronger demand in February,' said Peter Thomson, director general of the institute.

The overall index of manufacturing activity rose to 45.9 in February from 44 in January. Readings below 50 indicate contraction, but the rate of decline has slowed since October, when it stood at 41.8. Since then the MPC has cut rates by 1.5 percentage points.

But manufacturers are still shedding jobs. The Employment Index signalled a decline in the workforce for the 13th month in February. But the overall rate of decline was the lowest since May last year, as firms in the consumer goods sector took on staff to meet the expected growth in orders. While new orders fell in February, the rate of decline has slowed sharply, particularly among overseas orders.

Households are also feeling less gloomy - consumer borrowing rose sharply in January, according to figures yesterday by the Bank. Net lending stood at nearly ?1.4 billion, compared with ?745 billion the previous month.

City analysts said the strong credit figures and the unexpectedly positive Cips' survey would have less influence on the MPC's decision tomorrow than the revised earnings figures, published today for the first time in three months. A survey by the Reuters news agency showed that 16 out of 26 City economists expect the Bank to make no change in rates.