Hopes fade for interest rate cut

Click to follow
The Independent Online
SENIOR officials preparing for next week's world economic summit have dashed hopes that the meeting could trigger a co- ordinated round of European interest rate reductions, despite speculation yesterday that the Bank of England was poised to cut British base rates.

'In terms of Europe, I do not expect immediate commitments to reduce interest rates,' one official said ahead of the annual summit of the Group of Seven richest industrial nations, to be held in Munich on 6-8 July.

'We want to get to a position where there will be lower interest rates, but I don't expect people will be asked to sign up to a type of pledging mission to action there and then,' he said.

As officials were dampening speculation about European rate cuts, the Bank triggered rumours of an easing in Britain by shaving the rates at which it buys long- term bills in the money market by 1 32 of a percentage point.

The Bank acted in similar fashion ahead of the last reduction in base rates, in early May. But dealers said that this time the Bank might simply have been falling in line with the easing in long-term market interest rates that accompanied Thursday's half-point cut in the US discount rate.

Nonetheless, the stock market and the money market took the rumours to heart. 'This does not look like an innocent technical move', said Nigel Richardson, economist at S G Warburg. 'The Bank would be perfectly well aware of the reaction that its actions were likely to cause.'

The FT-SE index of 100 leading company shares rose by 21 points to close at 2,497.1. The key money market interest rate which tracks City base rate expectations fell by 1 16 of a percentage point to 97 8 per cent.

Most analysts expect the next rate cut to be a quarter-point, which would take base rates to 9 3/4 per cent - probably too small to trigger a fall in mortgage rates. It would match rates in Germany and France.

The rate cut speculation saw the pound slip by just over half a pfennig to DM2.8954. David Simmonds, a currency analyst at Midland Montagu, said the rise in shares limited the pound's fall by sucking funds into sterling.

Mr Simmonds said that as the Bank had admonished market operators for missing the signals ahead of the last rate cut, it should not be surprised if they were now over-sensitive to technical operations.

The foreign exchanges were generally quiet, although the lira had a bumpy day on rumours that it was about to be devalued.

Industrial production in western Germany in April and May was 0.1 per cent down on a year earlier, compared with a fall of 1.7 per cent in the east, according to the economics ministry in Bonn.