Wall Street dive worries Europe

DIANE COYLE

Economics Correspondent

A dramatic morning plunge on Wall Street sent a shiver through shares and bonds in Europe yesterday.

The Dow Jones industrials index fell 50 points soon after opening, crashing through the psychologically important 5,500 level and triggering the New York Stock Exchange's curbs on computer trading. Although Wall Street recovered some ground later, European bond and stock markets ended lower.

The FT-SE 100 share index ended the day nearly 30 points lower at 3,714.6.

Fears that prospects for further interest rate cuts are fading lie behind the past few days' tumult in the financial markets, analysts said. Yesterday morning's dive in US share and bond prices was exaggerated by uncertainty over what Alan Greenspan, the Federal Reserve chairman, would say in his twice-yearly Congressional testimony in the afternoon.

Neil MacKinnon, chief economist at Citibank, said: "The markets have concluded that the process of interest rate cuts has been exhausted, and any more reflation will lead to inflation."

A small increase in the leading indicator for the US economy, up 0.2 per cent in December after declining in October and November, contributed to this change in sentiment yesterday, even though it had been expected to rise.

Hans Tietmeyer, Bundesbank president, yesterday played down hopes of lower German rates. He said the Bundesbank would look at long-term money- supply trends rather than month-to-month changes. Figures for M3, its target measure, are due this week.

Most City economists expect a new cut in UK base rates, despite disappointingly high lending and money supply figures yesterday. The Bank of England's total for new borrowing last month was far higher than expected, at pounds 9.8bn compared with pounds 6bn in December.

The introduction of the new gilts repo market distorted the figure, however, and the underlying increase was almost certainly much lower. Gilts repos also explained the surge in the year-on-year growth in M4, the broad money measure, to 10.7 per cent from 9.9 per cent.

Most analysts decided that these technical factors meant the alarming headline broad money growth would not derail the next cut in base rates.

However, the short sterling market in which traders bet on future base rate levels fell sharply yesterday. It pointed to rates barely any lower than the current level of 6.25 per cent through the course of this year.

Minutes of the January monetary meeting between the Chancellor and Governor, released today, are expected to show that Mr George advised against that month's reduction in rates due to worries about rapid growth in broad money.