London Market: Interest rates look set for another fall

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UK STOCKS and bond may gain this week, led by Barclays and other banks, amid expectations that two economic indicators will show inflation is under control and interest rates are likely to fall further after the Bank of England warned lower rates will be needed if the pound remains strong.

"Gilts may well perform better next week, given the possibility of rate cuts," said Keith Edmonds, an economist at IBJ International. "If sterling had softened as expected, the outlook for the UK economy would be sufficiently bright for the BOE to keep rates on hold. With the pound where it is, inflation will undershoot target, and rates will have to come down."

UK retail prices, due on Tuesday, and unemployment figures, scheduled for Wednesday, are expected to show inflation is slowing and economic growth still sluggish, paving the way for future rate cuts.

"The figures will show UK inflation staying subdued in the short term," said Tim Rees, director of Clerical Medical Investment Group. "That will continue to be supportive of UK markets."

Hopes that borrowing costs will decline further buoyed gilts last week, until figures showing a faster-than-expected rise in US inflation fuelled concern that US interest rates will rise. From Monday to Thursday, the benchmark 10-year gilt yield dropped 14 basis points to 4.65 per cent, only to climb 16 basis points Friday to end the week at 4.81 per cent. Edmonds said he expects gilts to rally as: "Markets often rebound after they have been oversold."

The international climate is something which is influencing the Monetary Policy Committee, and the US economy is reflecting the strong recovery in the global market," said Robin Aspinall, of National Australia Bank.

"In terms of the outlook for UK rates, the US figures do not have a lot of influence," said Aspinall. "The UK economy is still operating below trend and capacity. Sterling is strong and above the Bank of England's expectations. I don't see how the MPC can look at the inflation forecast and not cut rates."

The pound has gained more than 4.8 per cent against the currencies of Britain's main trading partners this year, even as the BOE trimmed rates.

Oil companies such as Shell Transport & Trading could gain if the price of oil continues to rise. Brent crude oil rose 4 per cent on Thursday and Friday, after OPEC said its members made 82 per cent of promised cuts in output in April, up from 73 per cent in March. Oil prices have surged 51 per cent this year.

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