The British chancellor, Mr Gordon Brown, is to rule out an immediate referendum on euro membership, but will leave open the possibility of a vote later in the current parliament, according to a senior banking economist.

Mr Brown is expected to announce sometime next month that Britain does not currently meet his five tests for euro membership, according to Mr Jeremy Peat, chief economist with the Royal Bank of Scotland.

However he believes that Mr Brown will leave open the possibility of reconsidering the issue later in the current parliament, which could run to mid-2005. Mr Peat was speaking on a visit to Dublin yesterday to address clients of RBOS subsidiary Ulster Bank.

The five tests cover convergence of the British economy with the euro zone, economic flexibility and the impact on investment, the financial sector and employment.

Staying out of the euro zone would damage relations with Britain's major trading partners and might hinder inward investment,said Mr Peat, while joining would risk abandoning a policy framework that had served Britain well. The important thing would be to debate the issues and minimise the risk for Britain, he said.

Economic governance in the euro zone needs to be reformed and this could affect the British view, he argues. The European Central Bank needs to change from its current targeting, which combines money supply aggregates with a goal of keeping inflation at two per cent or less.

Mr Peat favours a "symmetric" target of two per cent, which means that the ECB would be equally concerned when inflation was under the target as when it was over it. Currently lower euro interest rates are needed, he believes.

Mr Peat joined other critics of the Stability and Growth Pact, which governs budgetary policy in the euro zone.

It needs to recognise the difference between investment spending and government consumption, he said, and of the stage of the economic cycle and the varying debt positions of the members states.