Pound slumps on rate-cut fears

THE pound fell to its lowest level against the German mark in nearly three months yesterday on fears that the Government will continue cutting interest rates in the absence of economic recovery.

This triggered fresh speculative attacks on the long-suffering Irish punt. Sterling's fall took it lower against the punt than at any time since Britain left the European exchange rate mechanism, making it more difficult for Irish companies to sell their goods in Britain - the destination for a third of Irish exports.

In lively trading on the foreign exchanges, the pound was also hit by worries that the Government will have difficulty funding the ballooning public sector borrowing requirement. The mark was meanwhile boosted by a concerted effort from senior Bundesbank officials to pour cold water on hopes of an early cut in key German interest rates.

Kit Juckes, of Warburg Securities, said there was a growing consensus that Tuesday's one-point cut in base rates to 6 per cent would be followed by another at the time of the March Budget. He added that Tuesday's cut appeared to have been forced by bad news on unemployment, which was likely to continue. David Cocker, of Chemical Bank, said it 'smacked of panic'.

Sterling's slide brought an abrupt end to the punt's respite from speculative pressure. The currency was pushed to its floor in the exchange rate mechanism, defined by its position relative to the Belgian franc, the ERM's strongest currency.

The Irish central bank was forced to buy punts at the floor level and to raise its overnight interest rate from 14 to 100 per cent in an attempt to deter speculation on an imminent devaluation. The overnight rate had been cut from 15 per cent on Monday.

The Irish Textiles Federation, which represents 22,000 workers in the industry, added its voice to the chorus calling for a U-turn by the Dublin government. Brian Callahan, its director, said the situation was 'totally out of control' and that the punt should be devalued by 10 per cent.

Avinash Persaud, of UBS Phillips & Drew, said the punt was overvalued by more than 20 per cent against the mark and 10 per cent against sterling. He said this would 'normally not be defensible', but that the punt might be protected by EC-funded subsidies for Irish exporters.

However, most analysts believe that Dublin will soon be forced to capitulate. They expect the punt, like the pound, to be pulled out of the ERM altogther. The market would then be free to push it down in a de facto devaluation.

The French franc and the Danish krone, which were also seen as devaluation candidates in the new year, were little affected by the pressure on the punt.

The pound ended the day 2.82 pfennigs lower against the mark at DM2.3988. During the day it traded as low as DM2.39, less than two pfennigs above the all-time low reached in the aftermath of its departure from the ERM. Sterling also fell against the dollar, dropping by 2.2 cents to dollars 1.5145. Against a trade-weighted basket of currencies, it shed 0.9 points to 78.6 per cent of its 1985 value.

Rumours abounded during the afternoon that the Bank of England was buying sterling in an attempt to prevent the slide from becoming a rout. But dealers may have been reading too much into the Bank of England's commercial dealing.

Alison Cottrell, of Midland Global Markets, said the pound could come under further assault today following a speech on German monetary policy by Helmut Schlesinger, the Bundesbank president. He is expected to maintain the verbal pressure on wage bargainers and budget negotiators by taking a tough line on interest rates.

Lothar Mueller, head of the Bavarian central bank, said yesterday that 'conditions are not at the moment such that I could agree to a further easing'.

Mr Mueller told the magazine Finanzen that a rate cut would need lower inflation, lower money supply growth, wage settlements in line with productivity and drastic savings in public spending. He added that it would be disastrous if the Bundesbank cut rates to ease pressure in the ERM 'without strong reason'.