Inflation fall does little for sterling

STERLING yesterday remained pinned to the floor of the European exchange rate mechanism despite official figures disclosing an unexpected fall in the annual rate of inflation to 3.7 per cent.

There was also little support for the pound from official figures earlier in the week which suggested that the economy might have stopped falling more deeply into recession in the second quarter. In London yesterday sterling ended 0.27 pfennigs weaker at DM2.8160.

Elsewhere in the foreign exchange markets the dollar gained some strength after Hans Tietmeyer, the Bundesbank vice-president, calmed fears of an imminent increase in German interest rates. He also lent his support to recent central bank intervention aimed at establishing a floor for the US currency. The dollar also benefited from official German figures pointing to easing inflation pressures. In London the dollar closed 0.95 pfennigs higher at DM1.4690. Against the pound it gained 1.63 cents to dollars 1.9165.

Sterling continues to suffer from specific concerns. Analysts said foreign investors remained worried by the recent high-profile public debate on devaluation and speculation that the Government could introduce measures to stimulate the housing market, suggesting an increase in public spending.

There are also lingering worries that an eventual rise in German interest rates could not be ruled out despite encouraging news on the inflation front yesterday.

However, Mr Tietmeyer made it clear that no early increase was being considered when he said that the Bundesbank would re-examine interest rates in about two months.

Despite the mark's modest retreat yesterday several ERM currencies - notably sterling, the lira, the French franc and the peseta - are expected to come under renewed pressure ahead of the French referendum on the Maastricht treaty next month.

'In the run-up to 20 September most people will go into the mark,' said George Magnus, international economist at Warburg Securities. 'As long as there is a risk of a French 'no' to Maastricht, and as long as there is a risk of an increase in German rates, the pound will remain under pressure.'

A French rejection of the Maastricht treaty would be seen as the potential death knell of a move to European monetary union by 1997 and increase the risks of an ERM realignment.

Besides Mr Tietmeyer's remarks, fears of an early rise in German rates were reduced by a surprising fall in western German wholesale and producer prices. Wholesale prices fell by 1.3 per cent in July to stand 0.9 per cent below the figure a year earlier. This was the first year-on-year decline for two years.

In June wholesale prices rose 2 per cent above a year ago. Producer prices, meanwhile, inched 0.1 per cent lower last month to stand 1.1 per cent above a year earlier, a sharp deceleration from the month before.

Nevertheless, Mr Tietmeyer emphasised that the declines were due chiefly to a weakening of import prices because of the strong mark as well as a high base level for prices a year earlier. 'That is not stability generated by domestic factors,' he said.

The Bundesbank has consistently emphasised its worries over domestically-generated inflationary pressures, and does not share the growing view of some private German economists that the economy is weakening, perhaps sharply. Mr Tietmeyer yesterday dismissed such fears. 'A recession is not imminent,' he said.

The dollar drew some support from Mr Tietmeyer's assertion that the Bundesbank 'is not interested in a weaker dollar'.

Modest support also came from official figures which showed that US industrial production rose 0.4 per cent in July. This was more than expected and reversed a similar decline in June.

But the dollar stopped short of an outright rally after a slight fall in a respected consumer confidence index prepared by the University of Michigan.