Shares dive on interest fears: Fall through FT-SE 3,000 level could trigger international sell-offGeorge plays down dispute with Clarke

GLOOM over global interest rates yesterday helped propel the stock market into its biggest one-day fall for three months, slashing the value of shares on the London market by more than pounds 15bn.

The FT-SE index of 100 leading shares ended the day 68.4 points down on Tuesday's close at 3,020.7, its lowest since late September. Dealers fear that a fall through 3,000 could trigger widespread selling by foreign investors rebalancing their portfolios between world markets.

Meanwhile, Eddie George, Governor of the Bank of England, played down differences with the Chancellor of the Exchequer over the quarter-point cut in interest rates last February. Mr George told the Commons Treasury Select Committee that it was 'too soon to tell' whether the quarter-point cut in rates had been a mistake.

The slide in the stock market took hold late morning with some analysts blaming heavy US selling on the futures market. A host of other explanations were put forward with no dominating theme.

The cancellation of an auction of four-year German government bonds through lack of interest exacerbated fears about the pace of German interest rate cuts, triggered earlier in the week by Hans Tietmeyer, the Bundesbank president, who said the bank was not pursuing step-by- step rate cuts.

Reimut Jochimsen, a Bundesbank council member, said that rapid money supply growth in Germany was still a worry in setting interest rates.

Fears about further rises in US interest rates still overhang the market, pointing up the difficulty Kenneth Clarke would face in cutting rates in Britain any further. Cautious trading statements by companies reporting their profits have also provided more cause for concern about the strength of the British economic recovery than official statistics.

Some dealers also cited hints by Treasury ministers that the Budget might include tax measures to discourage financial institutions from putting pressure on companies to make high and inflexible dividend payments as another reason for weak share prices.

Gilts fell alongside shares, despite a reasonably successful auction of convertible stock. The offer was subscribed two times over but the market was disappointed with the prices. The 6.75 per cent due 2004 fell by around a pound to pounds 89 1/2 to yield 8.25 per cent.

Coffee prices slumped after the Association of Coffee Producing Countries announced that producers would start unloading stocks on to the market.

Prices yesterday slid to a low of dollars 2,200 a tonne after hitting a seven and a half-year high of dollars 2,480 earlier in the week.

Meanwhile, Mr George disagreed with the interpretation of the Bank's most recent Inflation Report as blaming the rise in inflation expectations seen in the gilts market in recent weeks solely on February's reduction in base rates.

'It certainly wasn't the only factor in the market at the time,' Mr George said. He told the all-party committee of MPs that rising inflationary expectations made achievement of the 1-4 per cent inflation target 'much more difficult'.

Mr George did not outline the Bank's current view on monetary policy, but explained that he had agreed to the February cut in the light of the forthcoming tax increases and in view of an improving medium-term trend for inflation, forecast at the time rates were reduced.

He said financial markets had been rattled by the Federal Reserve's decision to raise US rates which had hit all financial markets, including the gilt-edged market which only lost ground sharply some time after UK base rates were reduced.

Commenting on the changes that have boosted the Bank's role in determining interest rate moves, Mr George said they were a 'terrific step in their own right' but fell short of full-blooded independence for the Bank of England.

The current position, in which the Chancellor still has the final say on interest rate changes, 'still leaves the decision as an amalgam of the political and the technical', he said.

(Photograph and graphs omitted)

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