U.K. RESERVES LIFT HOPES OF FURTHER BASE RATE CUT
  The record 4.9 billion dlrs rise in U.K.
  Reserves in May to a total 34.7 billion has lifted hopes for a
  further cut in bank base lending rates after the June 11
  general election, market analysts said.
      Sterling would have risen on the much better than expected
  number but for market nerves about the poll outcome, they said.
      But the weight of foreign currency and gold reserves now
  available to the authorities to support the pound should curb
  any market tendency to panic if U.K. Opinion polls show the
  ruling Conservative Party's lead slipping, they added.
      "We have been intervening to a very much greater extent than
  we have done hitherto," Chancellor of the Exchequer Nigel Lawson
  said at a news conference today, commenting on the news of the
  record reserves rise.
      He put the U.K. Intervention in the context of the Louvre
  accord between leading industrial nations to stabilise the
  dollar, partly through direct intervention on foreign
  exchanges. "We have been playing a very full part ourselves," he
  said.
      But market analysts see the recent upward pressure on
  sterling, and consequent need for official sales to damp down
  its rise, more in the light of local factors.
      Steven Bell, chief economist at Morgan Grenfell Securities,
  said that corporate money has been flowing back into Britain
  amid hopes of another Conservative government, after fears last
  autumn of a Labour election victory sent it flooding out.
      U.K. Portfolio investment is also returning, while foreign
  buyers see U.K. Growth propects and high bond yields as
  attractive. They will be strong buyers of U.K. Assets, notably
  equities, once the election is out of the way, Bell said.
      Analysts see this pressure as the main hope for lower
  interest rates, as the government is expected to try to reverse
  the loss of export competitiveness caused by a strong pound.
      Today, however, the pound hardly moved on the reserves
  news, dipping on its trade-weighted index against a basket of
  currencies from 73.1 pct of its 1975 value at 1000 GMT to 73.0
  pct at 1100 GMT, half an hour after the figures were released.
      "The market doesn't want to do anything because of the
  election," commented an economist at a big U.S. Investment bank.
      Several dealers and analysts added that market forecasts of
  a rise in reserves of between one and three billion dlrs had
  overestimated the amount of pound sales that were likely to
  have been disguised by swap arrangements or transactions on the
  forward market.
      The market also seemed to have overestimated the amount of
  sterling the Bank of England bought at the end of May to smooth
  the pound's sudden downturn, while some of the intervention
  reported in May probably occurred in April, they said.
      The key three months interbank money market rates eased
  about 1/8 point, reflecting cautious hopes that the downtrend
  in U.K. Interest rates will be revived following the reserves
  news, analysts said.
      Government bond prices initially firmed, but the market was
  muted as traders worried about the funding implications of
  another huge rise in reserves, they added.
      Morgan Grenfell's Bell forecast a half point base rate cut
  from the current nine pct level soon after the election, so
  long as poll projections of another Conservative victory prove
  accurate, with another half point later.
      Justin Silverton, equity economist at Credit Suisse
  Buckmaster and Moore, said a full point reduction might be
  possible. "Sterling will be held down by interest rate cuts in
  future, rather than this active intervention," he predicted.
      Kevin Boakes of Greenwell Montagu Gilt-Edged cautioned
  against over-optimistic forecasts, but agreed a half point cut
  looked likely.
      A cut before the election has been virtually ruled out.
      "The Bank (of England) is both worried about the political
  problem of cutting rates during an election campaign ... And
  has signalled some worry about broad money (growth)," said Robin
  Marshall, chief U.K. Economist at Chase Manhattan Securities.
      He said the 10 billion dlrs increase in total reserves in
  the past seven months may foreshadow full U.K. Entry into the
  European Monetary System.
      But Bell said the authorities would like to see another 10
  or 15 billion dlrs in the reserves before joining, if they did
  so. But, unlike many analysts, he doubted the U.K. Will go in.
  

