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Greenspan opens door to further US rate cut

THE CHAIRMAN of the Federal Reserve, Alan Greenspan, yesterday opened the door to another cut in US interest rates, and signalled that it may come sooner rather than later.

In a speech to business economists in Washington, he indicated that the scale of the economic downturn might be more severe than so far thought. "We are clearly facing a set of forces that should be dampening demand going forward to an unknown extent," Mr Greenspan told the National Association of Business Economics. "This is a time for monetary policy to be especially alert."

His comments will put more pressure on the Bank Of England to cut UK interest rates when the Monetary Policy Committee announces its decision at noon today.

A poll of City economists yesterday showed that 20 out of 32 expect a rate cut. A survey by Reuters put the chances of a cut at 55 per cent.

However, there remains a sizeable minority in the City which believes that the Bank may hold its nerve in the face of thinly-disguised attempts by the Chancellor, Gordon Brown, to bounce it into a rate cut.

Yesterday Mr Brown sought to soothe ruffled feathers at the Bank by telling BBC Radio: "I backed the Bank of England and I will back them in any decision they make this week."

Figures released yesterday by the Office for National Statistics suggested that pay pressures in the economy might not be as high as thought. The figures showed that bonuses paid in March were 30 per cent higher than a year ago and contributed 0.5 per cent to the average earnings index.

JP Morgan warned that even if rates fall today, the UK and US are both heading for recession next year. The bank's latest quarterly survey slashes both growth and interest-rate forecasts. Economist David Mackie said he believed that the UK would be in recession by the first quarter of 1999 and that base rates will be down to 4.5 per cent by the end of 1999.

"That is quite aggressive, but we see next year as being the weakest for the world economy since 1950," Mr Mackie said.

George Magnus of Warburg Dillon Read said that the Governor of the Bank of England, Eddie George, will have come back from Washington with the clear message that central banks need to stand together to provide liquidity. "If they don't cut it will be a big error of judgement. It means the cut in November will be even bigger. I think they will cut tomorrow and again in November."

Mr Greenspan's remarks support the view that more cuts are likely to combat a possible global economic downturn.

The move by the Federal Open Market Committee a week ago to reduce US rates by just a quarter of a percentage point disappointed markets. Many had hoped for a half-point cut. But in weekend discussions between the G7 industrial nations, the US, Canada and Britain all committed to easing monetary policy.

Mr Greenspan's comments and an overnight rise in the Tokyo stock market helped boost Wall Street, with the Dow Jones index about 100 points higher at mid-morning.

Congress is moving closer to approving new US contributions to the International Monetary Fund, a leading Republican said yesterday.