Shares hit record on misplaced optimism

LONDON shares yesterday rallied to a record level on hopes of a fresh fall in German interest rates, before a reduction was ruled out by the Bundesbank.

The surge in shares also came despite signs that UK rates are unlikely to be cut for some time.

The FT-SE 100 reached 2,778.8, its highest yet and 18.7 points up on Friday's close, after reports that the German economy has slipped decisively into recession. This renewed expectations that the Bundesbank would cut its official rates at next week's central bank council meeting.

But optimism over German rates proved to be premature when, late yesterday, Helmut Schlesinger said the Bundesbank was unable to bow to foreign pressure for fresh cuts.

Bundesbank suggestions that a cut in official rates is unlikely until next year could lead to a reversal in the stock market's recent gains and provoke renewed strains in the European exchange rate mechanism.

The latest signal that German rates would be kept at current levels came too late to derail a recovery of the Irish punt from weekend devaluation fears. Compared with an ERM floor of DM2.6190, the punt advanced by more than 2 pfennigs to close at DM2.6435.

By contrast, the French franc slipped to Fr3.3973 to the mark from a Friday close of Fr3.3925. Although the franc is comfortably above its Fr3.4305 ERM floor, it stands within a whisker of the Fr3.40 rate at which the Banque de France last week chose to take on a renewed wave of speculation.

Hopes of further falls in British rates faded yesterday after the narrow measure of money supply growth, M0, grew by 3 per cent in the year to November.

The Government is to issue a dollars 3bn 10-year fixed rate eurodollar bond, the biggest ever launched on international markets, to help finance repayment of marks borrowed from the Bundesbank during Britain's unsuccessful defence of sterling inside the ERM.

The issue is the final instalment of a Ecu10bn borrowing programme announced in early September before the ERM crisis erupted. The programme also includes mark bonds issued in September and October. The new issue is expected to yield about 7.2 per cent.