The failure of the dollar to rally on higher US rates leaves room for 'step-by-step' reductions, the sources said.
German cuts in interest rates should allow other European countries, such as France, to follow suit. But some Group of Seven officials believe that Britain has already used up its space to cut base rates further, even though speculation persists that a quarter-point cut, to 5 per cent, is in the offing.
The officials feel that the Bank of England remains reluctant to recommend a further reduction as long as the impact of April's tax increases on recovery remains unclear.
The Chancellor of the Exchequer and the Governor of the Bank of England meet to discuss interest rates on Wednesday, but the collapse in the gilts market last week will make it very difficult for them to agree an early cut without damaging further the battered credibility of the Government's anti-inflation policy.
Financial futures markets suggest that the next move in base rates may be up, with a cumulative rise of half or three- quarters of a point expected by the end of the year, taking base rates to 6 per cent.
Meanwhile, the International Monetary Fund will repeat its call for sharp cuts in German rates, in next month's World Economic Outlook. The Bundesbank is likely to ignore these demands, partly to keep down long bond yields, to which most German borrowing is linked.Reuse content