LAWSON REMARKS DASH HOPES OF EARLY U.K. RATE CUT
Chancellor of the Exchequer Nigel
Lawson's remarks yesterday suggesting there are precise
exchange rate targets for the pound undermined sterling,
dashing hopes for an early cut in U.K. Base rates, analysts
said.
    But the market's reaction, testing exchange rate levels
indicated by Lawson, was probably overdone and the longer term
outlook for sterling remained bullish, they agreed.
    In an apparent break with the previous policy of secrecy,
Lawson told a National Economic Development Council meeting he
was comfortable with sterling exchange rates around current
levels, specifying rates of around 1.90 marks and 1.60 dlrs.
    Lawson added the U.K. Government intended to keep sterling
at about present levels, using currency intervention and
interest rates to achieve this.
    The February 22 Paris agreement of the Group of Five and
Canada to stabilise exchange rates is widely believed to
include target ranges, but all participants to the meeting had
so far refused to specify these.
    Markets were quick to react to the statement, chopping
about one U.S. Cent and over one pfennig off the pound to match
the levels mentioned by Lawson.
    But most analysts polled said they did not believe Lawson's
statement signalled a change in U.K. Policy.
    Keith Skeoch, chief economist at stockbrokers James Capel
and Co, said, "the remarks have been blown out of proportion.
Lawson is paying now for a little bit of a slip of the tongue."
    Barclays de Zoete Wedd economist Mark Brett said, "there is
nothing great and fantastic in the Chancellor's statement."
    He said he did not believe the rates indicated by the
Chancellor were precise targets, but merely represented central
rates around which sterling would be allowed to fluctuate,
perhaps by as much as 10 pct.
    "It would be insane to pinpoint an exchange rate ahead of an
election ... I don't believe Lawson is mad enough to tie
himself to a fixed rate," Brett said.
    Currency markets were keen for official statements to
clarify the scope of the Paris accord and reactivate currency
trading. This mood easily led to over-reaction, analysts said.
    "Making similar statements when the market is high strung
and ready to bounce is perhaps a mistake," one senior dealer
with a U.S. Bank said.
    Capel's Skeoch said, "it gives the foreign exchange markets
something to shoot at."
    "It is obvious that the government, as a member of the Group
of Six, has agreed exchange rate bands. But they are not cut in
stone, they can change with time," Skeoch said.
    Brett said, "we think the 2.90 marks level is a central
rate. Give or take 10 pfennigs and all is fine."
    Not all analysts played down the significance of the
remarks, however. Chris Dunn, economist at Royal Bank of
Canada, said the remarks may signal a decisive move to insulate
sterling from the fortunes of the dollar.
    Although about two-thirds of Britain's trade is conducted
with European countries, sterling has traditionally shadowed
the dollar rather than the mark, analysts noted.
    "Britain must decide whether it wants to follow the U.S. Or
throw in its lot with Europe," Dunn said.
    "It suggests that while the U.K. Is not actually applying to
join the European Monetary System, it is seeking protection by
shadowing it ... The Bundesbank has made it clear that it wants
the U.K. To clarify its position relative to the mark," he said.
    Analysts said sterling's dip on currency markets following
Lawson's remarks made an early half-point cut in U.K. Base
rates from current 10 pct levels unlikely in the short term.
    "Over the next three weeks, a cut is out, unless we get some
extremely good economic indicators," Capel's Skeoch said.
    Base rates have been cut twice by one-half point in March,
the last after the March 17 budget presentation, and analysts
had been expecting another half point cut shortly afterwards.
 REUTER
