The euro takes a pounding

Sterling soared to its highest level yet against the euro yesterday, intensifying the Bank of England's dilemma over interest rates and casting a shadow over government plans to prepare Britain for possible entry into the single currency area.

Driven by expectations that the bank will keep base rates on hold at 5.25 per cent tomorrow, the pound rose to 1.52, equivalent to more than 2.99 German marks.

Figures released yesterday showed manufacturing output contracting for the 13th successive month, with industry calling on the government to bring sterling down from levels now higher than when Britain joined the exchange rate mechanism in October 1990.

Trade union leaders appealed to the bank for a further loosening in monetary policy. 'The bank must make a bold decision and cut interest rates by half a per cent immediately to guarantee a strong economic recovery,' said the TUC's general secretary, John Monks. 'Such a cut will help to ease recessionary pressures in manufacturing.'

However, the recent signs of recovery in the rest of the economy have left City dealers convinced that the bank's monetary policy committee will be reluctant to lower rates for a seventh time at its two-day meeting beginning this morning.

In the longer run, a continuing strong pound will make it impossible for the government to contemplate entry into the euro zone because it would lock in a rate that would leave large sections of British manufacturing permanently uncompetitive against rivals in the rest of Europe.

Both the bank and the treasury were hoping that the introduction of the euro on January 1 would end uncertainty about the single currency and lead to a lower pound. But the euro's 10 per cent decline in the past four months has resulted in the pound climbing steadily higher on the foreign exchanges.

Sterling was also up against the dollar yesterday, rising almost two cents to $1.6257 in its biggest one-day increase for four months.

With British short-term interest rates more than double those in the euro zone, dealers believe that the pound will remain attractive to investors, particularly with the main European economies suffering from slow growth.

Britain's two-tier economy was reflected in data yesterday showing demand for credit buoyant but manufacturing still struggling to emerge from recession.

Data from the bank indicated that households are borrowing more as they become more confident about their financial situation.

Consumer borrowing rose by ?1.25bn in March, a sharp rebound from February's ?1bn total, according to the bank. Personal loans and rising credit card debt accounted for much of the increase.

Mortgage lending also accelerated sharply, rising by ?3.1bn last month, the largest increase since the bank began collecting the figures in 1993. Halifax, Britain's biggest mortgage lender, reports today that house prices rose by 0.2 per cent last month.

The latest snapshot of manufacturing from the Chartered Institute of Purchasing and Supply showed employment fell for the 15th month running last month.

The rate of contraction is slowing however, according to the institute, and some economists detected signs that manufacturing might have passed through the worst of the recession. Trends in output, new orders and purchases are improving, according to the survey. But export orders were down again after staging a brief recovery in March.