Currencies

The British pound is expected to fall this week as economic reports show benign inflation and slower growth, suggesting interest rates could fall by the end of the year.

"We're looking for a trickle downward in sterling," said Stephen Roper, the chief executive of UK ceramic maker Churchill China. "When it gets to DM2.70 or below we can start to live with it."

The pound fell to $1.6207 on Friday from $1.6268 the day before. It rose three-quarters of a pfennig to DM2.9137, however, advancing for a second day as the mark was undermined by concern Russia will not pay its debts to Germany, its biggest lender.

A report Tuesday should show Britain's key gauge of inflation, retail prices minus mortgage interest payments, slowed to an annual pace of 2.6 per cent in July. That rate would compare to 2.8 per cent in June and would bring inflation close to the Government's 2.5 per cent target.

UK. growth is also expected to be slower. Economists are forecasting gross domestic product in the second quarter will be unrevised at an annual 2.6 per cent, down from 3.0 per cent in the first quarter. That report is scheduled for release on Thursday.

The Bank of England said earlier last week that a slowdown in the UK is "now evident" and will push annual growth down to about 1.0 per cent by the spring of 1999.

The UK benchmark interest rate is at a five-and-a-half-year high of 7.50 per cent. If it falls, so will the money-market return on sterling deposits. A rate cut could come by the end of the year, based on the interest rates futures market. The yield on the December short-sterling contract slumped to 7.54 per cent, suggesting a quarter-point rate cut before the year end.

"The pound is on a downward track," said Francis Breedon, a currency economist at Lehman Brother International, who expects sterling to decline to DM2.75 by the end of the year. "We think February for the first rate cut, although there's a significant chance for one as early as November."

The UK currency has declined 6 per cent against the mark since it touched a nine-year high of 3.1102 on 31 March. Its losses have given some relief to Britain's exporters, who have struggled as the pound's two-year-long advance made their goods more expensive abroad.

"Life's been bloody awful, and we hope it will get a bit better now that the pound is falling," said Mr Roper, of Churchill China, which exports 55 per cent of its goods. "I'm not falling off my chair with excitement, but if there's going to be a steady trickle down, then we may see some tangible improvement in our exports by the middle of next year." He said that at a rate of "DM2.70, sterling will offer better opportunities to sell in Europe".

Mr Roper isn't the only exporter hesitant to start celebrating, and for good reason. The pound remains some 24 per cent higher against the currencies of Britain's 21 main trading partners than it was two years ago.

Britain's biggest hospital-supplies company, Smith & Nephew, will continue to place new projects in its overseas plants rather than those in the UK, since the strong pound makes British manufacturing expensive, said chief executive Christopher O'Donnell. "If this is a signal of a turnaround in the pound then it would be very encouraging to the manufacturing sector," said Mr O'Donnell, whose company generates 80 per cent of its sales from overseas. "But actually I don't think anything will improve for us until the Bank of England lowers rates so they're in line with European rates."