The September short-sterling futures contract slumped from 94.55 to 94.41, suggesting that the market expects a quarter-point rise in base rates from their current 5.25 per cent in the next couple of months and a rise of a full percentage point by the end of the year. The three-month inter-bank interest rate rose in parallel.
The nervous mood was exacerbated as BZW raised its forecast for base rates at the end of the year by half a percentage point to 5.75 per cent, and for the end of next year by a quarter-point to 7 per cent.
'In light of second-quarter gross domestic product growth and (Tuesday's) CBI survey you have to consider the increased likelihood of rising interest rates', BZW's Robert Barrie said.
The gilts market also suffered, with its fall triggered by the publication of an unexpectedly strong 1.3 per cent rise in US durable goods orders for June and an upward revision to the May figure. This hit the US Treasury market amid fears that the Federal Reserve may raise rates again next month.
Gilts also suffered from bruised sentiment after a disappointing auction of pounds 2bn of long-dated stock. Falls in Continental bond markets during the afternoon also triggered technical selling of gilts futures after a key psychological barrier was breached.
Share prices were dragged down too. Having traded just 9 points down in the early afternoon, the FT-SE index of 100 key London shares closed 34.9 points down on the day at 3,082.3.
There was better news from the Council of Mortgage Lenders, which reported that the number of home repossessions fell for the fifth consecutive half-year to its lowest for four years. In the first six months of 1994, 25,020 properties were repossessed, 1,740 fewer than in the previous six months.
The CML said the number of people in arrears also fell, with 142,230 loans now in arrears for more than a year. But Adrian Coles, CML's director-general, warned that arrears and repossessions might rise again if the Government cut the support given to unemployed home-owners by the Department of Social Security to help with mortgage interest.
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