Governor plays down base-rate cut: Shares and bonds soar on hopes of reduction despite Eddie George's caution

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The Independent Online
EDDIE GEORGE, the Governor of the Bank of England, said yesterday that he was 'no counter-inflation fanatic' but played down the imminence of a further cut in base rates unless there was new evidence that slack in the economy was exerting more downward pressure on inflation.

Nevertheless, hopes that interest rates will be cut sooner rather than later gave a fresh fillip to the stock market yesterday as shares rose sharply to reach new peaks and government bond prices scored widespread gains.

By the close the FT-SE 100 had risen 40.1 points to 3,277.4 and long-dated bond prices ended 25 32 higher. Since the eve of the Budget the stock market has risen 141.6 points, 4.5 per cent.

The catalyst for the renewed optimism was stronger-than-expected demand at yesterday's auction of government bonds. An offering of pounds 3bn 6.75 per cent 2004 stock was subscribed 2.19 times against market forecasts of 1.2 times, the same as in the last auction in September.

Dealers said they were puzzled at the strong response to the auction. Some suspected that US investment houses, attracted by hopes of an imminent cut in interest rates, had flooded in at the last moment to make offers for stock.

The Bank of England took advantage of the market's enthusiasm to announce that it would be making an additional pounds 1.2bn of index- linked and conventional bonds available for dealing from today.

In evidence to the Treasury and Civil Service Select Committee, Mr George said the Bank would be very sensitive to the scope for future changes in rates.

He said it was quite clear that the Budget tax rises would have an impact on confidence and on activity. But offsetting influences, such as the long-run impact of interest rate cuts, should ensure that consumer spending would continue to grow at about 2.5 per cent next year 'notwithstanding the impact of taxes', he added.

He admitted that 'the response of consumer spending may be different to that assumed, but the issue is whether that is the most likely outcome. It isn't' If growth were hit by the Budget tax rises, however, that would increase the extent of spare capacity in the economy and subdue inflation further. 'That would determine the scope for future movements in base rates.'

The Budgets in March and November together would add three- quarters of a point to the retail price index, Mr George said, but the Bank still expected underlying inflation - the retail price index excluding mortgage interest payments - to remain within the 1 to 4 per cent target range.

Commenting further on the real economy, the Governor warned against excessive hopes that the sharp fall in joblessness would continue. While unemployment would remain on a downward path 'I'd be less confident that the pace of fall would continue'.

(Photograph omitted)