IMF even less confident than two days ago

The International Monetary Fund has cut its estimates of growth in the world's major economies for this year and next, raising expectations of a concerted round of interest rate cuts.

Stock markets on both sides of the Atlantic rallied strongly yesterday, as speculation intensified that central banks will be forced to cut borrowing costs to rescue the ailing global economy.

In a leaked copy of its twice-yearly World Economic Outlook, the IMF cuts its projections for US economic growth to 2.2% this year, and 2.6% in 2003, from estimates of 2.5% and 3.25% made in its last assessment, published just two days ago.

The eurozone fares little better, with German economic growth projected to hit just 0.7% this year, and 2.1% in 2003, down from previous forecasts of 0.9% and 2.7% respectively.

The IMF had suggested it was likely to downgrade growth forecasts, in a gloomy report on the US, published on Monday. "The recent weakness of equity markets, which has been exacerbated by corporate accounting scandals, could pose a risk by undermining consumer and business confidence," it said, warning that "the downside risks have intensified".

After that pessimistic assessment, some analysts were already predicting the Federal Reserve could cut rates as early as its meeting next week to put a floor under the markets. Lehman Brothers yesterday joined Goldman Sachs in forecasting that borrowing costs could fall as low as 1% - from their current historic low of 1.75% - by the end of the year.

By early afternoon in New York, renewed hopes of an interest rate cut had helped push the Dow Jones up by 307 points, or 3.84%, to hit 8,352.38, after three consecutive days of heavy losses.

"This is classic. We have had three days lower, and now we have a snapback," said Ted Oberhaus, manager of equity trading at Lord Abbett & Co. "You have a lot of people talking about a Fed ease. I guess everybody is afraid of missing out on a rally."

On the foreign exchange markets, the dollar also benefited, surging to one month highs against sterling, the euro, and the yen. Fears that US investors would be forced to repatriate funds to cover their losses on the stock market also helped boost the currency, which rose to €0.965 - its strongest since June 21.

London investors took heart from the buying spree in the US, pushing the FTSE100 index of leading shares up 134.6 points, or 3.4%, to close at 4,131.

Shares in Cisco Systems were up by 7% in mid-day trade on Wall Street at $12.21 ahead of publication of the company's year-end results, due after the close of the market. Cisco has been bruised by rumours, strongly denied by the company, that there were concerns about the group's balance sheet and that either the chief executive or chief financial officer might be about to quit. The shares are down 33% this year.

The rumours appear to have been sparked by the suggestion that chief financial officer Larry Carter may be close to retirement. Analysts are expecting the company to record a 14% improvement in revenues to $4.9bn for the fourth quarter.