Following reductions in US and Japanese rates last week, the German Bundesbank's council meeting on Thursday - its last before the summer break - is the next focus of attention.
The moves in the US and Japan, along with cuts in French and Danish rates, induced stock market euphoria. In Japan, the Nikkei index soared nearly 1,000 points on Friday, while share prices in London registered their biggest gain since the pound fell out of the Exchange Rate Mechanism in September 1992. Wall Street joined in with a 38.7 point rise in the Dow Jones Industrial Average to a new record of 4,702.7. The chances of further rate cuts in Japan to breathe some life into the moribund economy are good. Jesper Koll, JP Morgan's economist in Tokyo, said there was a new policy regime that recognised the threat weak financial markets posed to the wider economy.
The Bank of Japan is expected to lower the official discount rate shortly, and has said it will act to ease credit. Friday's fall in interest rates was followed by 300bn worth of central bank loans to the banking system.
The Fed's move was also seen by most analysts as the first of a series of reductions. James O'Sullivan, an economist at JP Morgan in New York, said: ''The Fed could certainly follow up with another quarter point cut soon.''
Opinions are mixed about the probability of a reduction this week in Germany's key interest rate from its current level of 4 per cent. The latest inflation figure - 2.3 per cent in June - was a mild disappointment, but the important M3 money supply indicator is well below its target range. In addition, there was an unexpected rise in west German unemployment last month.
''The Bundesbank will likely cut key rates again in the next weeks,'' said Harald Jorg, a Dresdner Bank economist. Michael Lewis, senior economist at Deutsche Morgan Grenfell was less optimistic. ''I don't think they will change rates unless the dollar collapses again,'' he said.
The benign environment has made the case for a rise in British base rates less pressing. ''With American, Japanese and European interest rates coming down, it is hard to see any need for UK rates to go up - especially when the economy is slowing,'' said Bijal Shah, global strategist at Smith New Court.
The meeting between the Chancellor, Kenneth Clarke, and the Governor of the Bank of England, Eddie George, last week did not result in higher rates, but there was speculation that Mr George had advised an increase.Reuse content