U.K. BASE RATES WILL FALL AGAIN SOON, SAY ANALYSTS Today's modest half-point cut in U.K. Bank base lending rates to 10 pct signals the Bank of England's determination to maintain a cautious monetary stance, but financial markets appear set to force its hand, analysts said. They said a further half-point cut in base rates to 9-1/2 pct was bound to occur within the next week and rates may shed a further half point soon if markets remain buoyant. Earlier, markets were bracing for a one-point cut in rates after yesterday's budget set a sharp three billion stg reduction in 1987 government borrowing targets to four billion stg. Sterling money market rates moved lower again, with the key three-month interbank rate down to 9-5/8 1/2 pct at the start of business from 9-11/16 9/16 yesterday, and sterling rallied to four-year highs against the dollar in very active trading. Government bond prices also surged on the budget, with gains in excess of one point pushing yields on long-term paper below nine pct for the first time in nearly a year. But today's smaller than expected rate cut appeared to have placated markets for now, analysts said. Money market rates recovered up to 1/4 point from earlier lows while both sterling and gilts came off highs as trading ground to a near halt. Analysts said the slowdown was likely to be temporary, and the reappraisal of sterling assets by international investors was set to resume as early as tomorrow, leading to higher gilt prices, exchange rate advances and lower money market rates. "Today's cut was slightly disappointing," said Bill Martin, chief U.K. Economist at stockbrokers Phillips and Drew. "The Bank of England is taking a very cautious line ... To temper the markets' first rush of blood to the head after the budget." Analysts said the bank's move today to lend two-week cash to U.K. Discount houses at a lower 10 pct suggested it hoped to maintain the new rates for about that period of time. The analysts agreed success would depend largely on how sterling performs in the near term. Sharp rises in the pound's value could be checked initially through Bank of England intervention but eventually the gains would force the bank to cut interest rates rates again. "The market seems to have accepted the modest cut for the time being," said Midland Bank treasury economist David Simmonds. "But I am sceptical that the bank will be able to hold up rates for long." Simmonds said he saw sterling rising another two U.S. Cents this week from around 1.60 dlrs, forcing a rate cut by Friday. Robin Marshall, chief economist at Chase Manhattan Securities, said "There is another half point to come in the near term, this week or next week at the latest...We see a whole point off base rates in the next two or three weeks." Analysts stressed that apart from prestige, Britain had very little to gain from a sharp rise in sterling's exchange rate. Martin, of Phillips and Drew, said the dampening effect of a sterling rise on consumer price inflation would not materialise for at least nine months while its hampering impact on manufactured exports would show almost immediately. Analysts said the budget, featuring income tax cuts as well as cautious plans for public finances, had improved the chances of re-election for the Conservative government and probably advanced the election date. One must be held before June, 1988. Combined with overall good prospects for the U.K. Economy, this was likely to fuel a foreign rush on sterling-denominated assets, pushing the pound's value well above unofficial targets. With mark-denominated investments largely out of favour because of low yields and a dull economic outlook, Chase's Marshall said "Sterling is simply the best game in town, especially after the budget, and demand will remain strong."