London shares soar after US rates cut

London shares rocketed in early trading today, in response to the US's surprise decision last night to slash interest rates.

In the first few minutes of dealing, the FTSE-100 index of leading shares was up 144.8 points at 6184.7.

The TUC general secretary, John Monks, urged the Bank of England to follow the lead of the US Federal Reserve chairman, Alan Greenspan, in cutting base interest rates, but some analysts said this was "premature talk".

US stock markets soared yesterday, with the Dow Jones industrial average closing nearly 300 points ahead and the Nasdaq up 324 points, following the Federal Reserve's decision.

The news came as a welcome relief for the FTSE-100, which has been on a downwards slide. Yesterday it dived 134 points, or 2.2%, falling perilously close to the psychologically important 6,000 mark.

Mr Monks said today: "We have got slowing growth in employment, our inflation is low and yet our interest rates are higher than in euroland and I think the time is right now for the governor of the Bank of England and his colleagues to be as bold as Mr Greenspan in the States."

"They are already below the chancellor's target and their job is to try to keep to that target of 2.5% inflation. They have got loads of scope."

The Federal Reserve's move was a sign that it was shifting its key target from that of avoiding inflation to one of avoiding recession, said Mr Monks.

He added: "Although we are not in recession in this country, as far as manufacturing is concerned things are grim and two out of three workers in manufacturing are working in factories where output is falling.

"That is what the bank needs to address. By cutting interest rates they will also have some effect on the exchange rate and move us closer to where the euro is."

However, analysts said it was too early to talk about a similar interest rate cut in the UK. Jeremy Batstone, head of research at Natwest Stockbrokers, said the situation in Britain was significantly different to that in the US, and while the UK economy was slowing it was "not in a tailspin".

He said: "UK rates are set with the UK economy in mind." He added that he expected rates to fall around Easter.

The American rate cut, Mr Batstone said, was "a very, very risky move... it's a gamble of epic proportions. The rationale is fair enough, but the extent of the cut is slightly surprising."

Top of the London share risers today were battered technology stocks, which put in across-the-board leaps. Colt Telecom leapt 16%, BT was 7% higher and Vodafone jumped 6%, while tech stocks including chip designer Arm, software group Sage and telecom equipment firm Energis all put in double-digit percentage hikes.

The shock rate cut came against a backdrop of data showing the US economy is slowing. It will be seen by many experts as an acknowledgement of the problems the US faces, and the concerns of a recession in the world's largest economy.

The Fed said the action had been taken in the light of further weakening in sales and production, lower consumer confidence and tight conditions in some sections of the financial markets.

Mr Greenspan's action will bring US rates down to 6%, the same level as UK interest rates.

Attention will now be focused on the US opening bell this afternoon, to see if the Dow Jones and technology-dominated Nasdaq will sustain further gains.

Economists called the initial reaction on the markets a knee-jerk response. Analysts in the UK thought the reaction had now been factored into the US markets and when they opened later today there would not be a dramatic movement.

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Useful link
Press release: Interest rate cut - US federal reserve