THE Central Bank's currency dilemma eased slightly yesterday as the pound gained a little against a weakening sterling and fell back against the deutschmark.
The pound followed sterling down against the mark, as UK election speculation mounted and a survey underlined the problems of a strong sterling for exporters.
The pound closed at 95.38p against sterling, from 95.06p a day earlier and at 2.6500 deutschmarks from DM2.6618. It also fell back to 10.67 per cent above the weakest currency in the ERM grid as the French franc fell below the Italian lira again.
Traders took fright at two conflicting opinion polls in the UK. The Guardian poll showed the Labour lead slipping to just 5 percentage points while the Daily Telegraph put the Labour lead 2 points ahead, a jump of five points.
While the polls had a limited effect on London dealers sterling weakened significantly when the US market opened.
The markets are worried that the polls could be indicating a hung parliament or very small majority for the winning party.
The results of the CBI quarterly industry trends survey also undermined sterling. According to the survey, exporters' output orders had fallen 7 per cent.
Mr Jim Power, chief economist at Bank of Ireland, warned that another poll showing the Labour lead at around five points would affect sterling further.
In any event Mr Power expects sterling to remain vulnerable in the final week running up to the election. However before long it may retest 2.80 marks, he said, which would send the pound back below 95p again.
There was little immediate reaction to the EU Commission's forecasts for growth and deficits in EU countries.
However, Mr Power noted that the Commission's forecasts are usually politically influenced. The projection that Italy will have a budget deficit of 3.2 per cent this year rising to 3.9 per cent in 1998, would thus underline that the Commission and the German government wish to keep Italy out of the initial stages of monetary union.
"If they had a strong desire to see Italy in on day one they would have given them a 3 per cent projection like all the countries," he added.
Germany's Bundesbank also warned that the ability to sustain agreed economic criteria would be essential for those countries entering monetary union.
In its 1996 annual report, the German central bank said that budget deficits in most European countries remained too high, and that European countries still had a long way to go in cutting their budget deficits for monetary union.
Noting that European countries "with the exception of Germany" had made progress in reducing budget deficits last year the central bank nonetheless criticised attempts by some countries to effect only temporary improvements.
"Balance sheet cosmetics clearly do not help in the task of consolidation," the central bank said. "They neither create new fiscal policy scope nor strengthen the competitiveness of the private sector," it said in a clear warning to Italy, analysts said.
