Markets shrug off rise in UK and Euroland interest rates

Financial markets on both sides of the Channel rose sharply yesterday after central banks in Britain and Europe hiked rates, fuelling hopes that policy will stay on hold until Spring 2000.

Financial markets on both sides of the Channel rose sharply yesterday after central banks in Britain and Europe hiked rates, fuelling hopes that policy will stay on hold until Spring 2000.

The European Central Bank hiked rates for the 11 members of the single currency by 0.5 per cent within an hour of the Bank of England's quarter-point move.

Both moves were in line with forecasts that rates would rise to dampen down inflationary pressures building up as both economies recovered faster than expected.

Analysts said there were more rises in the pipeline but optimism was growing that UK rates would peak at around 6.5 per cent ­ lower than 7.5 per cent in the last cycle.

The markets applauded the pre-emptive moves. In London the FTSE-100 closed up 0.8 per cent to hit an eight-month high, Spanish shares surged 2 per cent and the German stock market rose 1 per cent. Both European and UK bonds rose sharply.

"This has clearly boosted hopes that rates won't have to be as high in the previous cycle," said Nick Stamenkovic, of IDEAglobal.com.

The ECB raised its main refinancing rate to 3 per cent from 2.5 per cent with effect from 10 November. The rise is the first since the ECB was established on 1 January and wipes out the 0.5 per cut in April. It is also the first concerted European rate rise since October 1997.

Wim Duisenberg, the ECB president, said the rise would dampen inflationary pressure that had built up as economic growth gained momentum. "Today's decision was a decision taken by consensus," he said.He added that the ECB had opted for a 0.5 per cent rather than 0.25 per cent rise to prevent speculation that another hike was needed in the run up the millennium. "We do want to be to the maximum extent possible predictable because only in that way can we be credible.We want to calm markets."

However, Mr Duisenberg refused to be drawn on when the next rate move would be, or whether the ECB had a bias towards tightening.

Analysts praised the ECB for opting for a 0.5 per cent rise, saying it would delay the next rise until spring 2000 ­ taking it over the potentially turbulent millennium period.

Eric Chaney, of Morgan Stanley, said: "I think we will still have 0.5 per cent in the pipeline over the next 12 months."

Some UK economists had called for the Monetary Policy Committee to raise rates to 5.75 per cent and said yesterday's move had delayed the inevitable. "Rates are likely to rise further as a precautionary measure against longer-term inflation pressures," said Philip Shaw, of Investec.

Speculation that the MPC is deeply divided over interest rate policy was fuelled after the Bank decided to issue no statement to accompany the rate hike.