Clarke may settle on a quarter-point rate rise

BY DIANE COYLE

Economics Correspondent

Speculation grew last night of a quarter-point rise in base rates to 7 per cent. The move, expected by some City economists, would represent a compromise between the Chancellor, Kenneth Clarke, and the Bank of England Governor, Eddie George, who have their monthly meeting today.

In the month since Mr Clarke last ruled against an increase, in what he described as a "finely balanced decision", the latest economic statistics have done little to tip the balance decisively one way or the other. On the one hand, there is more evidence of economic slowdown, particularly in the housing market and retailing. On the other hand, the pound remains as weak as it was when the Bank voiced its concern about the inflationary impact of a weak currency.

This suggests that both the Chancellor and the Governor will stick to their guns: the Bank will recommend a base rate rise and Mr Clarke will turn it down.

However, David Walton, senior economist at Goldman Sachs, points out that eventually one of them will have to give way or they will have to find a compromise. "They could settle on a quarter-point rise to 7 per cent, which would defuse all the financial market speculation."

Other analysts now think base rates should fall. Retail sales volumes declined in April. Manufacturing output has been mysteriously weak - although Mr Clarke and Mr George will have seen output figures for April, published tomorrow, before they meet.

The case for a cut in interest rates rests above all on the evidence that the housing market is declining further. Halifax Building Society reported a 0.9 per cent drop in house prices last month and is gloomy about recovery prospects.

However, two other factors are more likely than base rates to hold back a recovery. One is the fact that people who have taken out fixed-rate mortgages during the past two years will start to face big rises, of 2- 3 per cent, in their mortgage rate as the fixed terms expire between now and 1997.

The other is negative equity and the tougher lending criteria imposed by the banks and building societies as a result of the repossessions crisis.