Shares rally and raise hopes of end to crisis

The FTSE-100 index of bluechip stocks rose 157.5 points to 6440.8 in the first few minutes of trading on the London stock market.

Shares in Northern Rock were among the highest rises as hopes continued to rise that the banking crisis of the past five days is over.

The strong rally followed the decision by the US central bank, the Federal Reserve, to cut interest rates by 0.5 per cent to 4.75 yesterday, twice as much as expected.

Shares had already risen more than 100 points in London after the decision yesterday afternoon and are now at their highest levels since late July, when the credit crisis began.

Economists hope that the aggressive rate-cutting move in America means the Bank of England will be able to start cutting the cost of borrowing in Britain before Christmas, bringing relief to home owners and the high street.

Northern Rock shares continued the recovery that began yesterday when Chancellor Alistair Darling pledged a 100 per cent guarantee that all deposits would be safeguarded.

Northern Rock has also offered to waive all penalty payments triggered by savings withdrawals since the crisis began on Friday.

Today the shares rose another 22.75p to 329.75p, an eight per cent rise.

The Fed's rate cut sent euphoric stock markets soaring around the world. In New York the Dow Jones Industrial Average leapt almost 336 points to 13,739.39, its first 300-point gain in five years.There were big jumps on stock markets throughout the Far East.

However, some US economists said the cut was only storing up more trouble for the future because it would stoke up inflation and encourage more risky borrowing.

It was claimed today that Northern Rock will probably have to draw on its emergency funding with the Bank of England by the end of the week as short-term loans fall due for repayment. Details have also emerged of a disagreement between the Financial Services Authority and the Bank of England about whether Northern Rock should be bailed out.

It is claimed that the FSA repeatedly urged the Bank to offer an emergency loan to Britain's fifth biggest mortgage lender weeks ago. The Bank claimed it would encourage other banks to engage in risky lending.

Yesterday the Bank injected £4.4 billion of liquidity into the London money markets to restore confidence and encourage commercial banks to start lending to each other normally again.