Markets rattled by fall in US confidence

The odds on an emergency cut in US interest rates to boost the flagging economy shortened yesterday after a slump in American consumer confidence to its lowest level since 1993 sent shudders through equity markets.

Share prices in London fell by more than 150 points to below 4,000 in the wake of news that a slowdown in growth, the fear of terrorism and the prolonged bear market on Wall Street had a marked impact on consumer sentiment last month.

The Dow Jones was also more than 100 points lower after the release of the Conference Board's index of consumer confidence, which fell from 93.7 points to 79.4 in September. The reading was far worse than analysts had been expecting and well below the trough of 84.9 reached last autumn in the aftermath of September 11.

Early losses on Wall Street were, however, contained by optimism that the Federal Reserve, the US central bank, will cut interest rates next week from their 40-year low of 1.75%. Paul Ashworth, international economist for Capital Economics, said: "This is clearly an awful report. In our minds this makes a Fed rate cut on November 6 a near certainty."

With the financial markets now anxiously awaiting American data for manufacturing and unemployment due out later this week, the US treasury sought to remain upbeat about the economic outlook. "We see a number of signs that provide a basis for optimism," said Mark Warshawsky, a deputy assistant secretary.

On the foreign exchanges, the dollar came under pressure against the Japanese yen and the euro in the wake of news of the drop in US consumer confidence, but it later steadied after the International Monetary Fund downgraded its forecasts for eurozone growth this year and next. Only a month after it predicted growth for the 12-na tion eurozone of 0.9% in 2002 and 2.3% in 2003, the IMF cut its estimates to 0.75% and 2% respectively and called on the European Central Bank to adopt a bias towards lower interest rates.

Data released by the Bank of England yesterday suggested that UK consumers so far appear to have been unaffected by the gloom in the United States.

Mortgage lending rose by £6.9bn in September, only just short of July's record, with home loan approvals up strongly from 109,000 to 117,000. Consumer credit rose by £2bn, while spending on credit cards grew by £741m, prompting some City economists to doubt whether the Bank would follow the Fed's lead and cut UK rates.

"Another month, another record increase in borrowing," said Ross Walker, economist with the Royal Bank of Scotland. "Year-on-year growth in mortgage borrowing accelerated to its fastest rate (12.4%) in more than a decade."