London, New York surge on Fed rate cut hint

The FTSE 100 index brushed off early losses to stand 114.6 points higher at 6255.3 as relieved City traders took their lead from Wall Street, where the Dow Jones Industrial Average followed up last night's rally with a rise of 166.4 to 13,124.8. The FTSE 250 was also up more than 200 points, although volumes in London were low.

The latest buying spree followed comments by US Federal Reserve vice chairman Donald Kohn, who said recent market turbulence may reduce the availability of credit to business and consumers - suggesting he is open to cutting interest rates next month.

Wall Street was also gripped by rumours that Citigroup was looking at a merger with Bank of America, which encouraged investors to snap up the cheapest financial stocks in more than a decade.

Henk Potts of Barclays Wealth said: "We operate in a global market place, and once you start getting good news from America, it quickly filters through to the rest of the markets. We are also seeing bouncebacks from oversold positions. A lot of investors have woken up to the bargains that are out there in the market at the moment."

Shares have been on the back foot for much of November after the Fed appeared less keen to cut interest rates again this year. Chairman Ben Bernanke recently said that risks between growth and inflation were roughly balanced, sparking a major sell-off of shares around the world.

But after a speech in New York tonight, Kohn said: "The degree of deterioration that has happened over the last couple of weeks is not something that I personally anticipated. We are going to have to take a look at the stress in the credit markets when we meet in a couple of weeks."

Economists said the comments made a rate cut highly likely on 11 December. Chris Rupkey of Bank of Tokyo-Mitsubishi in New York said Kohn "has just given the markets the green light for a rate cut".

The Fed has already slashed rates twice in the past two months, from 5.25% to 4.5%, to stimulate growth in the world's largest economy.

However, increasing numbers of analysts reckon the US economy is heading toward recession, and tonight's stock-market rally will be short-lived.

Bear Stearns, a major underwriter of US mortgage bonds, is planning more job cuts in London and New York after it recently suffered its first quarterly loss as a publicly traded company. The cuts - which will include 20 in London - are on top of the 300 announced at the end of last month.

The Bank of England's monetary policy committee meets next week to set UK interest rates for the coming month, with economists split on whether it will leave rates on hold at 5.75% or cut to 5.5%.

The Bank is thought to be more concerned about inflation than its counterparts in America. Although there are signs that the housing market, consumer spending and wider economy are slowing, policymakers are worried that a cut in interest rates will send inflation soaring.

Arch-hawk Andrew Sentance last night followed up hawkish comments by fellow MPC members Charlie Bean and Rachel Lomax when he warned that high oil and food prices were a serious threat to inflation in the coming months.