Shares soar as City warms to Budget: Clarke tries to dampen growing speculation about interest rate cut as London market gains pounds 16bn

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The Independent Online
SHARE PRICES roared to a new record yesterday as the markets delivered one of the warmest Budget welcomes in years and speculation mounted that a further cut in base rates was on the way.

In frantic business almost equalling the level of trading when sterling was forced out of the exchange rate mechanism in September 1992, the FT-SE 100 Index shot up 66.3 points to 3233.2 - adding pounds 10.69bn to the value of the top 100 shares.

The Chancellor tried to prevent speculation about an early rate cut from developing an unstoppable momentum. Kenneth Clarke said the Budget measures had been fully taken into account when he and the Governor of the Bank of England agreed to cut base rates by half a point to 5.5 per cent last week.

'I was very glad to reduce interest rates last week but I won't do it again unless and until I am satisfied the conditions exist.' Mr Clarke added that rates would be determined by what the strength of the pound, shares, house prices and the amount of money in the economy told him about inflation prospects.

Led by banks, brewers, utilities and life insurance shares, the London market gained pounds 16bn in value - the largest daily increase this year. In a vote of confidence for Mr Clarke's measures to cut the pounds 50bn public sector borrowing requirement, government bond prices also raced to new records. Despite the outbreak of rate-cut speculation, however, traders were split on whether the reduction would come before Christmas.

The short sterling future, a guide to interest rate expectations, points to another reduction in base rates in the new year. The renewed speculation reflected Mr Clarke's tough measures and optimism over inflation. Mark Tinker, of James Capel, said: 'The Budget reminded the UK investor that there are no inflationary pressures visible anywhere.'

The London market was also cheered by soaring shares in Frankfurt and Paris, where there is optimism over lower rates. The Bundesbank's policy-making central council meets today and some analysts predict it will push market rates lower. A sharp recovery in Tokyo share prices and a firm Wall Street opening underlined the positive mood.

There was palpable relief in London that Mr Clarke had refrained from hitting consumers even harder by extending the VAT base, and removing the pension industry's tax privileges. The markets judged that Mr Clarke's first Budget had tackled the budget deficit without jeopardising economic growth. Alison Southey, of Nomura International, said: 'Mr Clarke has calmed fears about the PSBR without derailing economic growth.' Ian Shepherdson, of Midland Global Markets, called the Budget 'a roaring, storming success'.

Mr Clarke said the recovery was strong enough to withstand the Budget's impact in removing spending from the economy. Business and consumer confidence should be boosted as people were reassured that the Government had got its finances under control. Weakness in export markets offered a greater threat to recovery, he said.

Making it clear that any pay increases for public servants would have to be funded from efficiency savings over the next three years, the Chancellor suggested that the days of automatic annual pay rises may be over. He gave a strong hint that any rises were likely to be limited to 1 or 2 per cent.

The Chancellor also hinted that future Budgets may continue to erode the value of mortgage interest tax relief.

Mr Clarke said the Government had given a manifesto commitment to keep tax relief 'but not at any particular rate'. This leaves the option of steadily reducing its value through the rest of the parliament before killing it off after the next election.

Michael Portillo, Chief Secretary to the Treasury, denied the pounds 3.6bn cut in planned spending next year was achieved by unrealistically reducing the emergency reserve.