European markets soothed by Fed's limited rate rise

FINANCIAL MARKETS across Europe surged yesterday as dealers hailed Tuesday's decision by the US Federal Reserve to raise rates by just 0.25 percentage points and maintain a neutral stance, in line with expectations.

In London, the FTSE 100 index climbed 79 points or 1.25 per cent to 6,394 - its highest intra-day level in more than a month - before losing ground to close at 6,396.

The broad market Eurotop 300 index gained 1 per cent, while the narrower Euro STOXX 50 index of Euroland blue chips ended up 2 per cent. Paris stocks also closed up 2 per cent.

But Wall Street fell as economists focused on growing concerns that a strong recovery in the global economy would mark the end of the era of low interest rates on both sides of the Atlantic.

They focused on the Fed's statement that last year's cuts in rates to 4.75 per cent to cope with the Russian crisis were "no longer consistent with sustained, non-inflationary, economic expansion".

"This comment at least keeps the door ajar for further rate rises," said Stephen Lewis, chief economist at Monument Derivatives.

"It is a reminder that the Fed has yet to reverse all of last autumn's easing."

He said the Fed would watch closely any data that pointed to inflationary pressures, starting with second-quarter GDP later today. "The chief anxiety may well relate to US productivity growth. A downward revision to GDP could make productivity look even worse."

Yesterday, data showed US that home sales fell less than expected in July while orders for costly manufactured goods shot up at the fastest rate this year. "If I were the Fed and were looking at whether the domestic economy is slowing, I wouldn't be much comforted by these hikes," said Tim O'Neill of Bank of Montreal.

UK interest rates are now lower than in the United States for the first time since 1984. The differential boosted the dollar, which hit a four- week high against the pound of pounds 1.584.

Kevin Gardiner, chief economist at Morgan Stanley, said he expected rates to rise on both sides of the Atlantic. "Over the next six to nine months UK and US rates will go up almost in tandem but by the end of 2000 we would expect UK rates higher than the US."

Recent UK data have pointed to rising house prices and a surge in business activity over the summer, as businesses ran down their stocks to cope with demand. The quarterly industrial trends survey from the Confederation of British Industry later today is expected to point to a rebound in output.

Optimism was boosted by fresh data indicating the economic upturn was accelerating. Confidence among exporters has risen threefold over the past year, according to a survey that found most manufacturers expected overseas orders to climb in the next three months. Meanwhile, bank loans to small firms hit their highest level for almost five years in the second quarter, the British Bankers' Association said.

Economists also expect the European Central Bank to raise rates for the first time since it was formed to deal with rising growth in the 11-country zones. But the ECB is expected to leave rates on hold when it meets later today.

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