Share prices fall on fears of US interest rate rise

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The Independent Online
Share prices fell sharply on both sides of the Atlantic yesterday, overshadowed by the risk of an increase in US interest rates later today.

The FT-SE 100 index in London retreated further away from the symbolic 4,000 level, ending more than 44 points down at 3,919.7.

Most City experts believe Kenneth Clarke, Chancellor of the Exchequer, decided to leave base rates unchanged after his meeting yesterday with Eddie George, Governor of the Bank of England. Although the meeting ended too late to be sure of the outcome, Mr Clarke was expected to turn down the Bank's advice to increase the cost of borrowing by a quarter of a percentage point to 6 per cent.

However, the balance of the decision in the US is expected to tilt in favour of higher interest rates. Two thirds of Federal Reserve governors were reported, according to a leaked Fed document, to favour an immediate increase. If the vote on the Federal Open Market Committee today goes their way, it will be the first rise in US interest rates since February 1995.

Shares on Wall Street fell sharply enough to trigger the New York Stock Exchange's curbs on automated deals. Within a few minutes of opening the Dow Jones industrials index was more than 50 points down at 5,838, but rallied later to close at almost 5,895. Trading volumes were light because of the Yom Kippur holiday.

US Treasury bond prices fell too, despite a boost from confirmation that plans to issue inflation-indexed securities will be published tomorrow.

The financial markets are becoming concerned that a change in the interest rate environment will trigger the long-predicted crash - or "major correction" - on Wall Street. A growing chorus of analysts have warned that shares are overvalued, even as the Dow Jones index has headed towards the 6,000 level.

The Federal Reserve is expected, by a small majority of analysts, to raise rates by at least a quarter point because the US economy has managed to defy predictions that it would slow down in the second half of this year.

Even though there is no sign yet that inflation is on the increase, some economists fear that it is only a matter of time before an unemployment rate as low as 5.1 per cent triggers higher wages and prices.

The Bank of England's concern about higher inflation in Britain beyond the next few months, following the pick-up in the pace of economic activity, is shared by many City experts.

James Barty, UK economist at investment bank Deutsche Morgan Grenfell, said: "If the Bank called for an increase in interest rates at this meeting, I am very sympathetic. But obviously the Chancellor would like to avoid it if at all possible."

Other European stock markets also fell yesterday. In Paris, the CAC-40 share index dropped nearly 12 points to to 2,067.99.

The 30-share DAX index in Frankfurt closed down 19.06 at 2,627.04.