U.K. BASE RATES WILL FALL AGAIN SOON, SAY ANALYSTS
Today's modest half-point cut in U.K.
Bank base lending rates to 10 pct signals the Bank of England's
determination to maintain a cautious monetary stance, but
financial markets appear set to force its hand, analysts said.
    They said a further half-point cut in base rates to 9-1/2
pct was bound to occur within the next week and rates may shed
a further half point soon if markets remain buoyant.
    Earlier, markets were bracing for a one-point cut in rates
after yesterday's budget set a sharp three billion stg
reduction in 1987 government borrowing targets to four billion
stg.
    Sterling money market rates moved lower again, with the key
three-month interbank rate down to 9-5/8 1/2 pct at the start
of business from 9-11/16 9/16 yesterday, and sterling rallied
to four-year highs against the dollar in very active trading.
    Government bond prices also surged on the budget, with
gains in excess of one point pushing yields on long-term paper
below nine pct for the first time in nearly a year.
    But today's smaller than expected rate cut appeared to have
placated markets for now, analysts said. Money market rates
recovered up to 1/4 point from earlier lows while both sterling
and gilts came off highs as trading ground to a near halt.
    Analysts said the slowdown was likely to be temporary, and
the reappraisal of sterling assets by international investors
was set to resume as early as tomorrow, leading to higher gilt
prices, exchange rate advances and lower money market rates.
    "Today's cut was slightly disappointing," said Bill Martin,
chief U.K. Economist at stockbrokers Phillips and Drew. "The
Bank of England is taking a very cautious line ... To temper
the markets' first rush of blood to the head after the budget."
    Analysts said the bank's move today to lend two-week cash
to U.K. Discount houses at a lower 10 pct suggested it hoped to
maintain the new rates for about that period of time.
    The analysts agreed success would depend largely on how
sterling performs in the near term.
    Sharp rises in the pound's value could be checked initially
through Bank of England intervention but eventually the gains
would force the bank to cut interest rates rates again.
    "The market seems to have accepted the modest cut for the
time being," said Midland Bank treasury economist David
Simmonds. "But I am sceptical that the bank will be able to hold
up rates for long."
    Simmonds said he saw sterling rising another two U.S. Cents
this week from around 1.60 dlrs, forcing a rate cut by Friday.
    Robin Marshall, chief economist at Chase Manhattan
Securities, said "There is another half point to come in the
near term, this week or next week at the latest...We see a
whole point off base rates in the next two or three weeks."
    Analysts stressed that apart from prestige, Britain had
very little to gain from a sharp rise in sterling's exchange
rate.
    Martin, of Phillips and Drew, said the dampening effect of
a sterling rise on consumer price inflation would not
materialise for at least nine months while its hampering impact
on manufactured exports would show almost immediately.
    Analysts said the budget, featuring income tax cuts as well
as cautious plans for public finances, had improved the chances
of re-election for the Conservative government and probably
advanced the election date. One must be held before June, 1988.
Combined with overall good prospects for the U.K. Economy, this
was likely to fuel a foreign rush on sterling-denominated
assets, pushing the pound's value well above unofficial
targets.
    With mark-denominated investments largely out of favour
because of low yields and a dull economic outlook, Chase's
Marshall said "Sterling is simply the best game in town,
especially after the budget, and demand will remain strong."
 REUTER
