SPECULATION of lower Bundesbank interest rates to aid the sick German economy lifted sterling, gilts and shares in London, while the Irish stock market closed a fraction off the all-time high achieved earlier this year.

Sterling rose 0.70 pfennigs to 2.2419 deutschmarks, close to the top of its trading range over the past nine months, but slipped 0.74 cents to $1.5383 due to the strengthening of the dollar over the German currency.

Gilt-edged securities went stronger across the yield curve. Short-dated stocks were lifted by hopes of lower British interest rates following any German rate reductions. Long-dated stocks were boosted by the accumulation of economic statistics defining the extent of Europe's gathering recession.

Irish gilts were also stronger, rising 40p to 55p in the short to medium-dated area while there was also record trading in short gilt and interest rates futures on the IFOX market.

Equity markets joined in the City's positive response to Germany's economic problems. The FTSE 100 index closed above the 3700 level again with a day's rise of 47.9 points to 3710.6, only five points off its all-time high scaled earlier this month.

The ISEQ Overall Index closed up 17 points on 2298.65, a fraction of a point below last week's all-time high. Most of the demand for stock in Dublin was concentrated on the financials, which were boosted by the strength of bond markets and excellent results from the US banks.

Any reduction in Bundesbank interest rates is likely to be quickly followed by lower British interest rates. Chancellor Kenneth Clarke lowered bank rates by 0.25 to 6.50 per cent two months ago and further reductions to 6 per cent are expected by the middle of the year.