In the past few days, the Bank of England is thought to have sold perhaps as much as pounds 1bn- pounds 2bn for marks. The sales, to help repay loans advanced by the Bundesbank on Black Wednesday, led to the softer money market rates.
However, analysts believed that the speculation of a cut in base rates from the current 7 per cent was premature.
Most expect rates to be cut around the time of the Budget, which the Treasury yesterday set for 16 March.
The latest evidence on the economy is conflicting, and the Chancellor is known to believe that the full impact of the 'substantial' easing in monetary policy has yet to feed through.
The Bank's sales of pounds helped to drive down overnight money market rates as low as 4 per cent at one stage. The three- month interbank rate, which tracks City base rate expectations, edged just below 7 per cent for the first time this year. The pound dropped by 2.76 pfennigs to DM2.4868 but was just half a cent lower at dollars 1.5365.
The speculation was also helped by expectations that headline inflation for December, out today, will drop below 3 per cent for the first time since 1986.
But figures for notes in circulation in the first two weeks of January suggested that narrow money supply had continued to grow strongly in January, a point underlined in the Treasury's latest assessment of monetary conditions released earlier this week.
The Confederation of British Industry disclosed that London, one of the regions hit hardest by the recession, had begun to show faltering signs of an upturn, but said that the regional economy remained too weak to lift employment.
The CBI's London director, Jane Calvert-Lee, said there were encouraging signs that the bottom end of the housing market had begun to improve, helped partly by increased funding for housing associations. Telecommunications traffic was also displaying a slight increase.
In an early Budget submission, the Institute of Directors yesterday urged the Chancellor to lower rather than raise taxes, and called instead for spending cuts and a revolutionary new approach to public expenditure.Reuse content