Germans bring hope of cut in interest rates

Hopes of another cut in the cost of borrowing were boosted yesterday as a much bigger than expected reduction in German interest rates sent rates tumbling across Europe.

The prospect of lower United Kingdom interest rates was further strengthened by official figures showing little in the way of inflationary pressures in industry or the high street.

"Another cut in UK rates is now definitely on the cards," Simon Briscoe, an economist with stockbrokers Nikko, said.

Events moved rapidly after the influential German central bank, the Bundesbank, slashed its key short-term interest rate by 0.3 percentage points, to just 3 per cent. It takes the rate to its lowest level since 1979.

The Germans had been expected to cut rates in an attempt to kick-start the flagging economy and stem an alarming increase in unemployment. But in a surprise move, the French central bank followed suit, cutting one of its key interest rates. Previously, economists had thought a reduction in French rates had virtually been ruled by out by recent weakness of the franc.

Speculation of another cut in UK rates sent the stock market surging to another record high, with the FTSE index of 100 leading shares jumping 19 points, to close at 3891.1.

Consumer spending between April and June was lower than at the beginning of the year, a sign that rising house prices and improving high-street confidence have not triggered a damaging boom. And there was more good news for the Treasury on inflation, with a survey from the Confederation of British Industry showing manufacturers have no intention of putting up prices.

"The Chancellor has either been extremely lucky or he's got remarkable judgement, because just about every decision he's made on interest rates has been right," one City economist said.

Interest rates fall across Europe, page 15

City comment, page 17