Rate cut hopes keep shares soaring: Current account deficit narrows to lowest for two years Surplus in trade on invisibles rises by 10%

THE STOCK market pushed further into record territory yesterday, with hopes of an interest rate cut undimmed as figures showed the current account deficit had narrowed and that firms and consumers are only loosening their belts slowly after the recession.

The FT-SE 100 index closed 27.8 points higher on the day at 3364.9. Sellers were scarce and international buyers remained convinced that low inflation would allow the Chancellor to cut rates again in the new year. But a growing number of equity analysts warned that the rise in shares could soon be interrupted.

The market showed little reaction to the announcement that the current account deficit had narrowed by pounds 735m in the third quarter of the year to pounds 1.6bn, the smallest in more than two years.

The visible trade gap, the shortfall between imports and exports of tangible goods, was revised down slightly from earlier estimates to pounds 2.39bn, the Central Statistical Office said. The surplus in trade on invisibles - services, investment income and transfers - rose by 10 per cent on the quarter to pounds 777m.

The services surplus was boosted by about pounds 400m with higher earnings from insurance, but this was offset by a pounds 500m deterioration in transfers because of higher payments to, and lower receipts from, the European Union. Investment income rose slightly between the second and third quarters.

Investment in overseas companies to take control or active stakes was barely changed in the third quarter at pounds 4.4bn, but hands-off portfolio investment more than doubled from pounds 8.4bn to pounds 20.9bn, dominated by purchases of overseas government bonds. Foreign investors also brought British government bonds in record numbers.

Britain's net external assets rose to pounds 44.4bn by the end of the third quarter, up from pounds 38bn at the end of the second and the highest figure since the end of 1989. Britain was a net debtor in spring last year.

The improvement in the trade position in the third quarter added 0.4 per cent to the growth of the economy, but this was offset as firms ran down stocks of unsold goods. The CSO confirmed that the economy grew by 0.6 per cent in the third quarter but said that output in services had been slightly higher than was first thought. Output in construction picked up slightly, ending a three-year recession in the industry.

Consumer spending rose by 1 per cent in the quarter, with spending on vehicles and durable goods 10 per cent up on a year earlier. The rise in consumption outstripped the increase in consumers' income, cutting the savings ratio from 11.7 to a seven-quarter low of 10.6 per cent.

The CSO also reported that companies were strengthening their balance sheets, recording their highest financial surplus in more than eight years. But officials said there had been a 16 per cent fall in dividends which was as yet unexplained.

Economists remain unsure how Kenneth Clarke's Budget will affect activity in the fourth quarter. But figures from the Bank of England and commercial banks suggested that both consumers and businesses were nervous.

Lending by the banks and building societies included in the M4 broad money supply measure rose by pounds 500m in November. The British Bankers Association said companies were using capital issues, higher government spending and better profit margins to repay debt. There was 'some pick-up' in consumer borrowing. Lending to the financial sector remained strong.

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