Bond aims to fund borrowing requirement

A NEW fixed-rate bond paying interest of 7.75 per cent to basic-rate taxpayers for a year goes on sale today. It is the latest move in the Government's drive to fund this year's public sector borrowing requirement, expected by some City forecasters to top pounds 30bn.

The FIRST Option Bond will compete directly with building society savings accounts for deposits from basic-rate payers. Tax will be deducted from interest payments before they are credited.

The Building Societies Association said yesterday that continued competition from National Savings could hinder the societies' ability to bring mortgage rates down when the base rate is cut again.

Adrian Coles, head of external relations at the BSA, said: 'It is much easier to follow base rates down if you do not have competition from National Savings.'

Societies blame competition from National Savings for much of the difficulty they are having attracting deposits. In May net receipts were only pounds 179m against pounds 774m a year earlier.

Mr Coles said the rate on the new product was not as high as some societies had feared, but was still a threat. 'If it does not attract the money the Government wants, no doubt they will introduce another product with a higher rate of interest.'

The 7.75 per cent net rate on FIRST is a flat one applied to all investments from the minimum of pounds 1,000 to the maximum of pounds 250,000. There is a bonus rate of 0.3 points, after tax, on bonds of pounds 20,000 or more, giving a net rate of 8.05 per cent.

At 7.75 per cent, the starting rate on FIRST is not the highest return available on sums of pounds 1,000 or more from building societies. Some companies are also paying higher rates on guaranteed income bonds. But few societies are offering fixed rates at present.

FIRST investors will automatically be rolled into a new fixed- rate bond at the end of each 12- month anniversary unless they pull out. Anyone cashing in the bond before the first anniversary will receive no interest.

Anthony Nelson, Economic Secretary to the Treasury, who launched FIRST yesterday, refused to be drawn on whether the Government had already discounted a further cut in interest rates when setting terms.

He said he had been conscious of the criticism from building societies about recent competition from National Savings products. 'I hope and believe this is pitched about right to attract funds but not disrupt other havens.'