Short sterling futures suggested by base rates might even rise by June, although most economists thought this highly unlikely. 'The market has completely lost touch with reality,' Ian Shepherdson of Midland Global Markets said.
Despite the markets' pessimism, most analysts still believe that the Government will sanction another politically inspired quarter-point rate cut before the local and European elections in May and June, in part to offset the depressing effect of next week's imposition of VAT on domestic fuel. But some economists fear that the final base rate cut could be followed very quickly by the first increase as inflation rises and the trade gap widens.
Gloom on interest rates was deepened by a warning from Hans Tietmeyer, the Bundesbank president, that the rapid growth in the German M3 broad money supply measure demanded continued caution on German rates. 'We cannot and may not simply ignore these results, for if they are continued over a longer time, that could signal the build-up of a new inflationary potential for the future,' he said.
The stock market had a roller- coaster day, with the FT-SE index of 100 leading London shares losing 33 points during the morning but then recovering to close 7.3 points higher on the day at 3,129, helped by the futures market. Traders said few institutional clients were buying, although some stock was being bought for the opening of the new account on Monday.
Sales in the engineering industry in the three months to January were unchanged on the previous three months, according to the Central Statistical Office. Export sales rose by 3 per cent while home sales fell by 1.7 per cent.
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