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German rate cut cheers

European markets

LONDON: A surprise cut in German interest rates reinvigorated feeble European bourses on Thursday, pushing the London market near to record highs.

Trading screens across Europe lit up with increases in stock prices after Germany's central bank slashed 0.5 of a percentage point off its key discount and lombard rates, boosting business prospects.

The timing of the chop surprised markets, which had opened the day in lacklustre trading on expectations that Frankfurt would leave the rates unchanged.

London, Europe's biggest bourse, surged close to its peak following the cut, which put the discount rate back at an all-time low and paved the way for rate cuts elsewhere in Europe.

But the dollar failed to react decisively. The U.S. currency rallied about half a pfennig against the mark but did not make a strong break-out above the key 1.51 marks resistance level.

"I would have thought a 50-basis-point cut would have caused a larger rise in the dollar but I think we will end the day higher," said one dealer.

But European stock markets welcomed the news. After hitting peaks this week, they fell sharply on Wednesday because of uncertainty surrounding the direction of interest rates.

London, Frankfurt and Paris all perked up although Wall Street started with losses. British shares climbed 18.5 points to 3,828.8 on the FTSE index after the German move -- close to the all-time high of 3,839.7 touched briefly on Wednesday before the jitters set in.

Although the FTSE later fell back slightly, the Mid-250 index of second-string companies was 24.4 points higher at a new peak of 4,488.5.

"The Bundesbank's move caught people on the hop -- I think most had been expecting a quarter point cut at most. Takeover talk is still around and market makers seem to be short of stock," one head of sales trading said. London looked healthy anyway, with sentiment underpinned by takeover speculation swirling in the electricity sector and much-as-expected inflation data which fostered a bullish mood after the shrap drop on Wednesday.

"There's a feeling that the market will resume its upward momentum," said one trader. "With the bids we are having there's plenty of cash around and there's a heavy dividend inflow in the next few weeks."

The Bundesbank move gave Frankfurt a boost too. Stocks closed 0.5 percent up on the DAX index as floor trading ended and levels continued to climb in after-hours computerised dealing.

"Talk about unpredictable...even the decision came an hour earlier than usual. Now it's out there, people will look at the dollar and see how much it likes it," a London dealer said in reference to Frankfurt.

"This may well be the last discount cut but it suggests very strongly that the time before rates start rising could be a long way off," he said.

Frankfurt's initial reaction to the central bank's move had been hesitant, reflecting a view that a rate cut might be regarded as the last in the cycle -- which could prompt a sell-off in equities.

But Paris spurted ahead 0.7 percent after the Bundesbank announcement, which raised hopes of a cut in France. Shares had opened weaker after a fall on Wall Street overnight.

The dollar's failure to make a breakthrough was a surprise as the U.S. currency should have attracted a rush of investors because of lower German interest rates.

The dollar reached only 1.5093 marks by midafternoon compared with 1.5063 in late European trading on Wednesday. Against the yen it fell to 107.45 from 108. 28 on Wednesday.

CURRENCIES AT 1415 GMT

The dollar was at 1.5093 marks and 107.45 yen, compared to Wednesday's levels in late Europe of 1.5063 marks and 108.28 yen.

STOCK EXCHANGES AT 1415 GMT

London - The Financial Times-Stock Exchange index of 100 leading British shares was up 10.7 points at 3816.3.

Paris - The CAC-40 share index was up 12.15 points at 2,087. 27.

Frankfurt - The 30-share DAX index ended up 11.34 points at 2,535.32.

PRECIOUS METALS

Gold was fixed at $391.30 an ounce, compared to Wednesday's close of $391.55. Silver was little changed at $5.32.-Reuter