BANK OF ENGLAND RESISTS PRESSURE FOR RATE CUT

  The Bank of England again fought against
  money and bond market pressure for a pre-Budget interest rate
  cut, leaving the pound to take the strain with a further rise
  in its trade-weighted index to a six-month high.
      It closed at its best level since September 12, at 71.4 pct
  of its 1975 value on the index, as foreign investors continued
  to buy into a currency which offers high relative returns and
  the possibility of short-term capital gains, dealers said.
      Meanwhile, opinion is divided over whether the Bank can
  stop a cut before Budget Day, March 17, and why it should want
  to.
      The Bank's latest strong signal to the market that it wants
  rates to stay steady for the moment came in midafternoon, when
  it lent to the discount houses at a penal rate of 11-3/4 pct to
  relieve a money market shortage.
      "They're really making the discount houses suffer," said
  Stephen Lewis, economist at brokerage house Phillips and Drew.
  "Eleven and three-quarters pct is way above money market rates."
      This money market signal was apparently not accompanied by
  any sterling sales on the foreign exchanges, talk of which had
  inhibited strong rises yesterday and Tuesday, so buyers came
  strongly into the pound.
      The pound surged to a high of 1.5798/808 dlrs at the London
  close, up from the previous finish at 1.5650/60, and 2.8900/60
  marks, up from 2.8720/50.
      "If this pressure keeps up...There is a possibility that
  rates could drop before the Budget," said Jeremy Hale, economist
  at finance house Goldman Sachs International Corp.
      Some gilt traders are forecasting a half-point cut in the
  base rate from the current 11 pct as early as tomorrow.
      However, analysts said the Bank of England will need to be
  convinced that the present rise is a fundamental re-rating
  rather than a result of short-term speculative gains.
      There are valid reasons for the Bank to be cautious, said
  Peter Fellner, U.K. Economist at brokers James Capel and Co.
      Markets have become highly optimistic about the chances of
  a Conservative Party victory in any early general election, and
  disappointment if Prime Minister Margaret Thatcher decides to
  hold back could lead to a decline in the pound and a setback
  for bonds, Fellner said.
      An election could be delayed until mid-1988, but most
  forecasts say it will be this year.
      Others note that the pound could yet prove vulnerable to
  oil price losses or a change of fortune for the dollar.
      However, analysts agree the Bank is largely trying to set
  the timing of a cut than holding out against one altogether.
      The authorities traditionally prefer a single sustainable
  rate move, one way or the other, to half points here and there.
      Some add the Bank will be influenced by signs that at least
  a proportion of the latest bout of sterling buying is long-term
  capital coming into the London market, notably from Japan.
      They argue that the pound is being perceived as a safer bet
  than the dollar, given the latters recent sharp falls and
  current political upheavals in Washington.
      The Bank may want to see another few points on the
  trade-weighted index before the Budget, argued Lewis. "But by
  then sterling should be firm enough to satisfy even the Bank of
  England," he added.
      The Bank declined to comment on its reasons for resisting
  pressure for a rate move before the budget, but banking sources
  said the authorities see the recent rise in sterling as more
  than just marking up by foreign exchange traders.
      Meanwhile, analysts noted the market ignored potentially
  harmful news on the trade front, today's figures showing that
  the current account deficit in 1986 was 1.1 billion stg.
      This was above previous estimates of the current account
  deficit and compares with a surplus of 2.9 billion stg in 1985.
      Fellner said that under more normal conditions this would
  have given the bond and currency markets a pause, but that they
  were too bullish to worry about such fundamentals.
      The guessing game over the timing of a cut has the clearing
  banks divided as well as the markets. Privately, some bank
  officials forecast the Bank will hold out at least for this
  week, but at least one bank says a rise is possible tomorrow.
  If a move comes before March 17, forecasts are for a half-point
  cut, with another half or full point about Budget day.
  

