Generosity' blights City hope of interest rate cut

City expectations of further interest rate cuts were being scaled back last night in the wake of a budget package that analysts reckoned would give a boost to the economy.

The pound strengthened, share prices held on to earlier gains, but gilts fell back as financial markets took the view that the combination of tax cuts and extra public spending would give the Bank of England's monetary policy committee pause for thought.

'The bond market saw the 'give back' number and did not like it. I think the reaction is probably overdone because the ?4 billion will be staggered,' said Alison Cottrell, an economist at PaineWebber. 'The market wanted to see something that said the next meeting of the MPC would cut interest rates, and it did not get it.'However, she was still expecting rates to fall below 5 per cent, compared with the current rate of 5.5 per cent.

Others were less optimistic. 'So far the Budget looks to be on the generous side of expectations. One would have to be cautious about forecasting subsequent cuts in interest rates,' said Philip Shaw, Investec economist.

However the TUC said the MPC should slash borrowing costs and quickly. 'Given the Chancellor's forecast of rising government surpluses, the case for an early and large cut in interest rates is overwhelming,' said John Monks, general secretary.

The Confederation of British Industry responded coolly. 'We asked for a boring budget, and this is not a bad result,' said Adair Turner, director general.

'The fiscal balance is reasonable, provided that the economic recovery takes place in line with the Chancellor's forecasts.'

Back in the City, bond analysts were cautious about the how the Chancellor would pay for the measures he had outlined

Neil Parker, chief economist at Royal Bank of Scotland, said: 'There's a little bit of disbelief that the funds are actually going to be there.

'There might be a nasty surprise somewhere down the line' in terms of increased bond issuance.

Gilts fell by 50p, but on the foreign exchanges the pound jumped half a cent against the dollar to $1.6172 and strengthened against the euro, which closed at 67.25p

'We are already beginning to see a turnaround in the economy, and I don't think the MPC will be so keen to cut rates, so this will naturally be sterling supportive,' said Cameron Crise, currency strategist at Warburg Dillon Read.

The prospect of lower corporation tax helped to support the stock market, which closed up 28.9 at 6232.7.