Chancellor expected to hold rates

The economic conditions give Kenneth Clarke strong grounds to resist increasing base rates at today's monetary meeting with the Governor of the Bank of England, while bequeathing to the next Chancellor the need for a post-election rise in the cost of borrowing.

Fresh figures yesterday showed a surprise drop in total industrial production in February masking a steady upward trend in its manufacturing component. Meanwhile the pound climbed above DM2.79, partly in the expectation that interest rates will go up next month.

With the likelihood that mortgage rates will rise when base rates are finally increased, election-related uncertainty is denting people's optimism about house prices, according to Barclays Bank.

Its monthly survey showed that levels of mortgage advances were still rising - in March they were 15 per cent up on a year earlier. But the proportion expecting house prices to rise has slipped from 69 per cent to 61 per cent.

"While the uncertainty will probably be short-lived, it is unfortunate that people are holding back at an ideal time to buy a home," said Jim Chadwick, marketing director at Barclays Mortgages. The bank warned that demand for properties still far outstripped supply.

Official statistics showed that total industrial production dropped by 0.6 per cent in February. The warmer-than-usual weather was the culprit, with lower electricity and gas production and lower North Sea extraction.

Manufacturing output increased by 0.2 per cent during February, and its January increase was revised up to 0.5 per cent. Production is now growing 1.8 per cent year-on-year, the best since late 1995.

In the latest three-month period the production of both textiles and clothing and rubber and plastic declined. The strongest sectors were metals and engineering, the latter very reliant on exports.

"The strength of domestic demand is offsetting the impact of the stronger pound on exports," said Jonathan Loynes, UK economist at HSBC Markets.

City economists remain cautious about the potential impact of the strong pound. "Manufacturers are by no means out of the woods," said Mr Loynes.

But even if industry does remain subdued, a majority of analysts think the strength of the rest of the economy means the cost of borrowing will have to go up after the election, possibly as early as 7 May.

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