Bank acts to avert gilts bloodbath: Mexican assassination piles on the agony as world stock markets plummet

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The Bank of England struggled to prop up the plunging gilts market yesterday as fears of rising inflation prompted futures traders to price in a half-point jump in interest rates by the end of the year.

The sudden leap in the cost of money market borrowing led a number of building societies to withdraw or raise the interest rates on fixed-rate mortgages.

The fall in gilts accompanied a global drop in bond prices, but was more severe than most. Worries about rising US interest rates, the Whitewater scandal facing President Clinton and the killing of the leading contender for the Mexican presidency added to the gloom. Fears that the North American Free Trade Agreement would be jeopardised saw the Dow Jones Average fall 48.37 points to 3,821.09 by the close.

The bloodbath in the gilts market saw the 8 per cent stock due 2013 dive by pounds 211 32 to pounds 10118 32 , yielding 7.84 per cent. Gilts underperformed German bunds with the difference between the yields on 10-year bonds rising to 1.4 percentage points.

Share prices slid in sympathy, but the Bank's support operation pulled the FT-SE index of 100 leading shares off its lows. The index closed 33.6 points down at 3,121.7, its lowest since late November.

The pound also slid, especially against the German mark, which was boosted by fading hopes of further early cuts in interest rates after figures showed annual growth of 17.6 per cent in M3 broad money supply. Sterling closed 2.14 pfennigs down at a four-month low of DM2.4974. City economists said they feared that Kenneth Clarke might soon cut interest rates again to revive Conservative political fortunes, only to be forced into a humiliating reversal. Futures pointed to base rates of 5.75 per cent by the end of the year, compared with the current 5.25 per cent.

'The last cut in base rates did not have much credibility, but another one would score zero in that respect,' said George Magnus, economist at Warburg Securities.

The turmoil in the markets overshadowed the Central Statistical Office's announcement that Britain's current account deficit widened from pounds 1.8bn to pounds 2.6bn between the third and fourth quarters of 1993, giving a pounds 10.7bn deficit for the year as a whole. The surplus on invisible trade - services, investment income and transfers - was barely changed at pounds 1.2bn in the fourth quarter, although 1992's surplus on investment income was revised down by pounds 1.5bn to pounds 4.3bn.

The Confederation of British Industry's latest monthly survey of manufacturers showed a sharp improvement in export orders, but a slightly more pessimistic outlook for factory production.

'Domestic demand for UK manufactured goods may be slackening ahead of April's tax increases,' the report said.

Separately, the CSO revised down its estimate of economic growth last year from 2 to 1.9 per cent, while reporting that the savings ratio fell from 11 per cent in the third quarter to 10.2 per cent in the fourth as consumer spending rose more than personal disposable income.

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