With expectations of further cuts strengthening by the day, gilt- edged stocks jumped by more than 1 1/2 points at one stage and share prices advanced sharply, with the FT-SE 100 index climbing more than 40 points in early trade.
But after Norman Lamont, the Chancellor, denied there had been a change of policy shares gave up some gains and closed 28.7 points higher at 2,645.7. Gilts also went into partial retreat to end less than half-a-point higher.
Expectations of base rates close to 6 per cent by Christmas gave way to more conservative estimates of around 7 per cent.
Sterling, meanwhile, lost ground after the Bundesbank signalled a smaller-than-expected fall in German market rates. In London the pound retreated two pfennigs to close at DM2.4359.
The Prime Minister's statement that 'a strategy for growth is what we need, a strategy for growth is what we are going to have' was yesterday blithely dismissed as signalling a new economic strategy by the Treasury.
Before delivering a speech on Russian economic reforms to the Adam Smith Institute, the Chancellor said there was 'no way' that there had been a change of policy.
Downing Street officials also appeared to lower expectations of a radical shift when they said that economic policy following the devaluation of the pound would be 'fleshed out' in next week's Mansion House speech by the Chancellor and in the subsequent Autumn Statement.
Speaking on Radio Four's World at One, Stephen Dorrell, Treasury Financial Secretary, followed suit. Referring to the recent devaluation of the pound and the subsequent cuts in base rates, he said: 'What we have seen is the Prime Minister drawing attention to the opportunity that our policy has created.
'What that policy has been directed to doing is to deliver a low rate of inflation which allows the economy to grow.'
Though Treasury officials declined to rule out another cut in rates, they insisted there was no significant shift in policy which implied a rise in public spending.
'Of course Major is for growth, but he is not going to do a Keynesian stimulus,' said one. 'Strategy will be based on sound money.'
A Treasury official said: 'Is this a new policy? It isn't' He added: 'Policy has always been based on low inflation. The Prime Minister wanted to emphasise sustainable non-inflationary growth.'
He went on to explain that Mr Major's motivation in seeking a series of television interviews on Tuesday night was aimed at restoring confidence. 'With so much gloom and doom we want to deal with the confidence question,' he said.
The Prime Minister's intention was to reassure the country that public spending on capital projects which could create jobs would be safeguarded as much as possible, but only at the expense of cuts in 'current' spending like public sector pay, the Treasury said. But the new system of controlling spending was not being abandoned.
Downing Street suggested yesterday that the pounds 244.5bn planning total for the 1993-94 financial year would hold.
With the Treasury aiming for a mid-November Autumn Statement on spending, the remaining Cabinet discussions will focus on whether the private sector can be encouraged to take on capital projects like roadbuilding.
Downing Street, meanwhile, dismissed recent reports of tax increases in the next Budget to cover increases in public expenditure as 'wild speculation' and ruled out any tax measures in the forthcoming statement.
Britain's DM5.5bn five-year eurobond is being issued at a price of 101.71 per cent with a coupon of 7 1/8 per cent, the lead manager, Deutsche Bank, said yesterday.
The bank added that a fixed re- offer price was set at 99.96 per cent which would allow the bond to yield about 7.13 per cent, some 10 basis points above the yield on equivalent German government bonds.
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