Shares soaring on City hopes of early cut in interest rates: Pound's rise strengthens pressure on Clarke to safeguard recovery

SHARES soared yesterday after a prolonged Christmas break as dealers scrambled to take advantage of renewed optimism about further interest rate cuts and low-inflationary growth in the British economy.

The FTSE-100 index of leading shares climbed 49.7 points, or 1.5 per cent, to a record high of 3,462.0.

This rise, adding almost pounds 10bn to share values, was the largest one-day increase since the stock market jumped by 66.3 points in the wake of the Budget on November 30. Strong rises in overseas stock markets during the four-day Christmas break, particularly Far Eastern, provided early momentum to the market.

The renewed strength of shares comes as Kenneth Clarke, the Chancellor, faces mounting pressure to sanction a further cut in interest rates in the new year to help safeguard the economic recovery from his Budget tax increases.

A growing body of opinion among his most senior advisers inside and outside the Treasury is said by Westminster sources to have moved in favour of a cut of at least half a point despite ministerial optimism that the recovery is gathering momentum.

Sterling was also in demand against the mark, closing nearly 2 pfennigs up at DM2.5655, as speculation grew that the Bundesbank was about to put in train a fresh cut in interest rates. This raised hopes that the British authorities would be able to follow suit and prompt a small fall in bank base lending rates from their current level of 5.5 per cent.

Despite strong buying of the dollar, prompted by encouraging US economic indicators, that left sterling 1.3 cents lower at dollars 1.4910, the pound's index against a basket of currencies closed 0.3 up at 82.0, its highest level since October 1992.

A rate cut next month would have the added advantage of influencing the mortgage rates of well over a million homeowners whose payments are fixed by annual review. Mortgage rates for 1.2 million of the 1.8 million Halifax borrowers are fixed for April on the basis of January 31 rates.

No decision on interest rates will be taken until Mr Clarke returns from the Far East early next month and voices within the Treasury and the Cabinet are cautioning against any further cut until the spring, if at all.

Some ministers believe the recovery is stronger than commentators accept, that a further cut is unnecessary, and that backbench pressure for further cuts has largely abated.

But an increasingly forceful argument in Whitehall is that if the pound continues to strengthen it should be 'capped' not least to ensure that prices help manufacturers to sustain an export-led recovery.

This is bolstered by the political argument that any cut designed to boost the Tories' flagging fortunes in time for the May local elections and the June European elections would have to be in the first quarter of 1993.

Stephen Dorrell, Financial Secretary at the Treasury, admitted that the pace of recovery would be slowed by the Chancellor's tax increases - equivalent to 7p in the pound on income tax in three years.

Low inflation and low interest rates, falling unemployment and the recent Gatt agreement on lowering trade barriers are all contributing to the optimistic outlook, according to Peter Morgan, director general of the Institute of Directors.

With many annual pay settlements at two per cent or less, even those who have argued that too low a level of base rates could be inflationary, say that such a risk is now negligible.

Oil prices tumbled to new five-year lows in London again yesterday, depressed by further confirmation of record North Sea oil output in an oversupplied market. Brent Crude futures for February delivery on London's International Petroleum Exchange opened at dollars 13.25 a barrel, the lowest since November 1988.