Hope of rate cut fuels record run for shares

THE stock market is expected to continue its record-breaking run this week as hopes of another cut in interest rates are fostered by good news on inflation and fears that tax increases could hinder recovery.

The FT-SE index of 100 leading London shares closed on Friday at a record 3,337.1, having topped 3,350 during the day. The index rose 25.9 points on the day, completing a gain for the week of more than 75 points. The market was helped by keen interest from foreign investors, and by computer- driven programme buying.

Most dealers and analysts expect the traditional pre- Christmas rally to continue unabated, a good omen for next year. Jerry Evans, equity strategist at NatWest Markets, expects the FTSE to climb to 3,600 by the end of next year - as do several other analysts. He expects the market to be boosted initially by falling gilt yields, but then by corporate earnings.

'We feel that by the middle of next year interest rates will have run their course . . . the gilts market won't necessarily be the motor. By then earnings will start to take over,' Mr Evans said.

Roger Nightingale remains the City's super-bull, forecasting that the FTSE will end next year at 4,500, a gain of 34 per cent, around double that seen during 1993.

The markets remain convinced that the Chancellor will cut interest rates again soon, with most expecting a cut of at least half a point early next year. Hopes of a rate cut were fuelled by an unexpectedly sharp fall in underlying inflation to a 26-year low last week, while the latest survey of manufacturers by the Confederation of British Industry also suggested that pressure on prices remains subdued.

'Another sparkling set of retail price data confirms again that it is safe to cut base rates further, though we still doubt that they will fall until well into the first quarter,' said Kevin Gardiner of Warburg Securities.

Last month's 36,100 fall in unemployment suggests that there is no strong case yet for a cut in interest rates to boost recovery, but economists fear that the tax increases announced in this year's Budgets could still affect consumer spending, imperilling many of the new jobs created in service industries.

Not all analysts were confident that the market would maintain its momentum, with some predicting prices could be hit as investors cash in profits and market-makers pull prices lower before buying stock. 'The market is not looking particularly convincing after this rally. It remains to be seen whether we can continue this rally next week,' one dealer said.