City braced for day of panic over interest rates

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THE CITY of London expects base interest rates to go up today or tomorrow, despite reports that the Chancellor of the Exchequer and the Governor of the Bank of England agreed last week to leave them untouched.

Informal briefings for financial markets by officials failed to resolve the utter confusion caused by the Bank's actions in the money markets on Friday.

There was widespread agreement that if the Bank did not signal higher interest rates today or tomorrow, the pound would fall sharply. It jumped nearly 2.5 pfennigs to DM2.4423 on Friday after the Bank unexpectedly offered to pay higher rates to investors lending the Government money in the weekly auction of Treasury bills.

Most analysts expect Eddie George, the Bank's Governor, to opt for a rise in base rates rather than turmoil on the foreign exchanges, despite leaked reports that he and the Chancellor, Kenneth Clarke, had decided at their monthly meeting last Thursday to leave them unchanged. Either way, a second day of panic in both the money and stock markets is likely.

Stephen Hannah, chief economist at IBJ International, said: 'If base rates do not rise now the pound will fall sharply, and the Bank would have lost an enormous opportunity to demonstrate its commitment to keeping inflation low.'

The Bank cut interest rates by a quarter point to 5.25 per cent on 8 February, the last in a series of reductions after Britain left the European exchange rate mechanism in 1992.

An increase of a quarter or half point this week would be passed on rapidly by the banks to millions of borrowers, although mortgage rates could initially be unchanged as the gap between mortgage and base rates has been larger than normal since February.

An internal inquisition into the Bank's moves on Friday is likely. In the morning, its daily money market operations, which normally signal interest rate policy, indicated no change. In the afternoon, however, it offered much higher rates on Treasury bills.

Confusion was intensified by the fact that the senior Treasury officials responsible for interest rate policy were already on holiday, while Mr Clarke left for his holiday at the weekend.

Anger over Bank fiasco, page 23