Markets gain ground as ECB hints at rate cut

A strong hint from the European Central Bank it will cut interest rates next month has buoyed markets in early trading, following sharp gains in the US and Asia overnight.

The FTSE rose 2.12% this morning to trade at 5,197, while the German Dax and the French Cac 40 posted gains of 3.17% and 3.06% respectively, mirroring the Eurostoxx index's 3% rise.

US markets gained ground overnight, with the Dow Jones and the S&P 500 both ending more than 2% higher after minutes from the G20 summit in Washington pointed to a new rescue plan for the eurozone's debt-laden nations.

Comments by ECB governing council members yesterday suggested the central bank is considering cutting interest rates by 50 basis point at the next meeting on 6 October.

The ECB may also boost its liquidity provision to banks to avert the risk of recession, offering 12-month, limit-free loans to banks to help those struggling to raise capital, Reuters reports.

While a step back from the current 1.5% rate would represent a U-turn for ECB President Jean-Claude Trichet, who has historically been strongly anti-inflation, comments from policymakers suggested averting recession is now more urgent than containing inflation.

ECB's council member Yves Mersch said rate cuts would be considered if economic data continues to disappoint: "Interest rate cuts are not completely ruled out. Should there be, compared with current data, a significant worsening of the dynamics of the economy in the eurozone, we do have room to move."

Finnish member Erkki Liikanen added: "Risks to inflation are balanced and risks to growth are to the downside. And my personal opinion is that the risks to growth are substantially to the downside."