ANALYSTS SEE EARLY ONE POINT CUT IN U.K. BASE RATE
British bank base lending rates are
likely to fall by as much as one full point to 9-1/2 pct this
week following the sharp three billion stg cut in the U.K.
Central government borrowing target to four billion stg set in
today's 1987 budget, bank analysts said.
    The analysts described Chancellor of the Exchequer Nigel
Lawson's budget as cautious, a quality which currency and money
markets had already started to reward.
    Sterling surged on foreign exchange markets and money
market interest rates moved sharply lower as news of the budget
measures came through, the analysts said.
    Lloyds merchant bank chief economist Roger Bootle said he
expected base rates to be cut by one full point tomorrow.
    "This is very much a safety-first budget in order to get
interest rates down," he said.
    Bootle said the money markets had almost entirely
discounted such a one point cut, with the key three month
interbank rate down to 9-11/16 pct from 9-13/16 last night, and
it would be rather conservative for banks to go for a
half-point cut now.
    Midland Bank treasury economist David Simmonds said he,
too, expected base rates would be a full point lower by Friday,
but this would likely happen via two half-point cuts.
    "This budget is designed to please both the markets and the
electorate. The implications for interest rates are very
favourable, we could have a half-point cut tomrorow and another
such cut before the end of the week," Simmonds said.
    Pointing to buoyant U.K. Retail data released yesterday, he
said Lawson had done well to resist pressures for a sharp cut
in income tax rates at the expense of a lower borrowing target.
"There is no real need to boost private consumption," he said.
    National Westminster Bank chief economist David Kern said
the lower borrowing target set in the budget had increased the
likelihood of an early one-point base rate cut.
    Kern said the budget would have to be analysed carefully,
in particular to see how exactly Lawson planned to achieve the
sharper than expected borrowing target cut, before a one-point
base rate cut could be implemented.
 But providing the budget small-print was convincing, "and I
suspect it will be, it is entirely possible that we see one
point off base rates by the end of this week," Kern said.
    Bootle of Lloyds said the expected base rate cut would pave
the way for an early one-point cut in mortgage lending rates.
This would help achieve Lawson's lower than expected consumer
price inflation target of four pct at end-1987, he said.
    U.K. Base rates were cut last week to 10-1/2 pct from 11
pct after sustained pressure from the foreign exchange, money
and government bonds (gilts) markets.
    But building societies said they would not cut lending
rates until base rates had fallen by one full point.
 REUTER
