THE mandarins at the Central Bank must have breathed a collective sigh of relief at the surprise British rate cut yesterday morning. Sterling's recent rise against the pound had put them in something of a dilemma. The Bank likes to see a strong rate for the pound against sterling, but is also reluctant to be seen pushing the pound higher.

The British rate cut has now taken some of the wind from sterling's sails and a fall in the pound's value below 102p looks increasingly unlikely. It is just the tonic needed on Dame Street, which is anxious to avoid a set to with irate exporters.

Although the authorities do not like to admit it, it is in their interest to have a relatively high exchange rate against sterling. This is because a rate well over parity depresses the price of British imports and helps keep inflation in check. A rate below 102p worries the Central Bank as it could lead to inflationary pressures going into 1997, the key year for decisions on the Maastricht criteria.

Earlier this week, the bank even allowed short term rates to rise on the money market in a bid to increase the value of the pound against a weakening sterling.

While British rates are falling, the Central Bank here will not be keen to see further reductions, largely because of its off expressed inflationary fears. Yesterday's higher than expected credit growth figure of 11.7 per cent for April can only have strengthened the bank's resolve.

The Governor, Mr Maurice O'Connell, has frequently said he is worried about "lagging" pressures which could feed into inflation next year. Already, many analysts are predicting inflation of up to 2.7 per cent in 1997. Anything more than that and Maastricht qualification could come under real pressure.

The trend in the pound to sterling exchange rate will be one indicator on which the Bank will keep a close eye. The good news for exporters is that there are several factors which point to stronger sterling. First and foremost, the British currency's decline through the early months of this year may mirror the usual drop in the year before a general election.

In the last four general elections, from 1979 to 1992, sterling has declined by between 3 and 10 per cent against its main trading partners, only to appreciate again within two to three months of the election.

This time around the worst of the preelection weakening may be over. Future attempts by Mr Major's government to woo the voters could still unsettle investors, but it looks as if the market has actually "priced in" a Labour victory.

"New" Labour under Mr Tony Blair is seen as almost a positive for the markets. He is possibly more fiscally responsible than the Tories and has said he will introduce an independent central bank. Labour is also seen as more Euro friendly.

Many analysts also now believe key Maastricht criteria will have to be watered down to allow France and Germany in. This would automatically weaken the mark and boost sterling further.

Finally, there is an argument that the older populations in Germany and France will prove to be a serious drain on resources. Sterling could be seen as a real alternative to the mark for investment.

All these factors may not weigh immediately and a roller coaster ride for the currency up to the next British general election is a distinct possibility. One danger for the currency is that the latest rate cut is seen as politically inspired, which has unsettled the market.

The governor of the Bank of England, Mr Eddie George, opposed the move. So it is a measure of the Chancellor of the Exchequer Mr Kenneth Clarke's desperation to win the next election that he would have given in to backbench pressure to cut interest rates despite Mr George's opposition.

A rate rise after the election, which must be held by May 1997, seems inevitable. But in the meantime, it is possible Mr Clarke will again attempt to bribe the voters. That could yet mean more wobbles for sterling later this year.