THE decision by the US Federal Reserve to keep interest rates steady should help to keep a lid on sterling's upside and keep the pound at current levels, analysts said last night.

After the long-awaited meeting, the Fed left the federal funds rate at 5.5 per cent and the discount rate which it charges the banks at 5 per cent. There had been wide-spread speculation in international markets that the Fed would announce a rise in interest rates.

The Dow Jones Index close was up 1 per cent or 74.5 points and the dollar fell slightly after the meeting. Bank of Ireland chief economist, Mr Jim Power, said the decision to keep rates steady was likely to keep a lid on sterling's upside potential. "One of the key reasons for sterling's softening over the last couple of weeks is the softer dollar," he said.

As a result, the pound is likely to stay around current levels, he added. The pound closed at 93.28p against sterling in late trading from 92.94p a day earlier and at DM2.5978 from DM2.6001.

The pound has continued to come under significant selling pressure when it moves above DM2.60, mostly from overseas. Most people believed the pound was overvalued in terms of entering the single currency at a level above that, Mr Power noted.

Analysts predicting Fed inaction had pointed to a remarkable absence of inflationary pressure in the US economy despite solid growth and tight labour markets.

While the US economy grew at an annual rate of 5.6 per cent in the first quarter, growth is expected to slow to between 2.5 and 4 per cent in the second quarter in response to weakening consumer demand and stagnant industrial output.

In April, for example, retail sales were down 0.3 per cent, the largest slump since last June.

While the unemployment rate, at 4.9 per cent, is now at its lowest in 24 years, average hourly earnings - closely watched as an indicator of wage-driven inflation - rose just 0.1 per cent last month.