The FTSE 100 ended the day up 99.7 points at 5,331.2 as Monday's cut in Italian interest rates and a gloomy survey by the Confederation of British Industry (CBI) boosted expectations of rate cuts at next week's meeting of the Bank of England's Monetary Policy Committee (MPC).
The CBI - which is now calling for rates to be reduced from 7.25 per cent to 6.75 per cent - said manufacturing confidence had suffered its sharpest fall since July 1980.
Just three per cent of manufacturing firms are more optimistic than four months ago, according to the CBI, compared with 61 per cent which are less optimistic. This gives a negative balance of 58 per cent of survey respondents who are pessimistic about the future, compared with a negative balance of 44 per cent in July, a drop of 14 points. The CBI survey reveals weakness in both demand from abroad and demand in the UK. New export orders received by manufacturers over the last quarter fell at their fastest rate since 1977, while new domestic orders fell at their fastest rate since January 1992.
Looking ahead, domestic orders are forecast to fall further, albeit more slowly, while the pressure on exporters is expected to ease slightly following recent falls in the pound.
David Coleman, of CIBC Markets, said: "There has been some modest improvement in export balances, reflecting the fall in sterling since the last survey was conducted, but too little to make any impression on the overall picture. The only debate now is whether the MPC cuts by 25 basis points [0.25 percentage points] or 50 [0.5 percentage points]".
The pound, already well below its highs of earlier in the year, fell further yesterday. It ended the day down almost a pfennig against the German mark at DM2.767.
Rate cut hopes across Europe were given a boost by the larger-than-expected rate cut in Italy. All the large European bourses closed higher following the decision by the Italian central bank to cut its discount rate by 1 percentage point to 4 per cent. Italy - like other EMU participants such as Ireland - needs to cut its interest rate to 3.3 per cent, the level prevailing in France and Germany, by the end of the year.
Meanwhile, further evidence of the economic slowdown came from Abbey National, the bank, which admitted that mortgage arrears and bad debts were rising and 3i, the investment group, which said there were signs of banks tightening up on lending.
Separately, the Credit Card Research Group said credit card spending growth was just 11 per cent last month.
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