Rate doubts keep markets nervous: Dealers believe rise may follow next month's meeting of the Chancellor and Governor of the Bank of England

FINANCIAL markets remain nervous of an early rise in interest rates, but the Bank of England yesterday held base rates at 5.25 per cent ahead of today's publication of its quarterly Inflation Report.

The short-sterling futures contract ended the day predicting that base rates will have risen to about 5.9 per cent by the end of next month, although analysts believe this is too pessimistic.

September short sterling regained about a third of the ground lost during Friday's speculation on a rate rise.

The pound fell back after the Bank signalled that rates were unchanged, ending the day 2.2 pfennigs lower against the German mark at DM2.4232 and 0.27 cents lower against the US dollar at dollars 1.5390. Against other currencies the pound fell 0.4 points to 79 per cent of its 1985 value.

Fears of a rate increase were eased Bank of England figures showing slower growth of money circulating in the economy. The narrow money supply measure M0 - cash plus banks' balances at the Bank of England - rose 0.7 per cent in July after seasonal adjustments. This took annual growth to 6.5 per cent from 6.8 per cent in the year to June.

M0 is seen as a good contemporaneous indicator of high-street spending, but economists differ over its usefulness as a predictor of inflation. The Treasury's 'monitoring range' for M0 is 0 to 4 per cent, but M0 growth has been driven above this as low interest rates made it cheaper for people to hold wealth as cash rather than in interest-bearing deposits.

'Because slower M0 growth implies neither lower inflation expectations, nor weaker demand, nor a stronger exchange rate, it does not imply any diminution of inflationary pressures,' argued Chris Dillow, of Nomura Research.

Relief at the absence of a rate increase helped share prices, with the FT-SE index of 100 leading stocks closing 14.8 points higher at 3,097.4, at which stage Wall Street's Dow Jones Industrial Average was nine points up. It later closed up 33.67 at 3798.17.

Speculation on base rates was triggered on Friday when the Bank of England accepted tenders for 31-day Treasury bills at an interest rate three-quarters of a percentage point higher than in the previous week. This has left the Bank offering about 5.75 per cent for money lent for three months.

One dealer said that this amounted to the Bank giving pounds 600,000 away to market participants for no risk.

Ian Shepherdson, of HSBC Greenwell, said dealers were looking for the Chancellor and the Governor to agree a rate increase at their next meeting. 'But if they are waiting for a rate rise on 8 September, they could be waiting in vain unless the numbers published in the next couple of weeks are monumentally bad,' he added.

The markets will be paying close attention to today's Inflation Report from the Bank, following a period in which it has again been too pessimistic about the short- term outlook for the rate of price increases.

The dollar weakened slightly, with a series of US economic statistics suggesting that inflationary pressures were slightly weaker than expected. Personal income in the US rose 0.1 per cent last month, while personal spending rose 0.4 per cent. In the commodities markets, Brent crude oil for September delivery was pushed 75 cents higher to dollars 19.34 a barrel by a Nigerian oil workers' strike.

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