Hopes of early rate cut dim

HOPES of an early cut in interest rates have receded, ahead of a critical meeting between the Chancellor of the Exchequer and the Governor of the Bank of England on Wednesday, writes Robert Chote.

Anecdotal evidence of booming high-street trade during Christmas, backed up by an acceleration in the amount of cash circulating in the economy, has dampened demands for lower rates. But this would be the last chance for Kenneth Clarke and Eddie George to agree a cut that would affect most annually reviewed mortgage rates.

The futures market signalled on Friday that a half- point cut in base rates from their current 5.5 per cent by March is no foregone conclusion. But hopes of an early cut were encouraged by weak US employment figures, which suggested that a rise in US rates was less likely.

Steven Bell, economist at Morgan Grenfell, said the strength of Christmas trade had probably been overestimated, and that another cut in interest rates was likely. 'We would not be surprised if a half per cent cut in base rates were to follow the meeting between the Bank of England and the Treasury on 12 January,' he said. Most City economists expect at least one more cut in base rates, although perhaps not until the tax increases announced in last year's Budget take effect in April.