Clarke told of threat to 'delicate' recovery: Bank and building society chiefs give warnings on damage to consumer confidence if interest rates rise

BANK AND building society chiefs yesterday urged the Government not to raise interest rates.

As the Chancellor of the Exchequer and Governor of the Bank of England met for their monthly monetary policy meeting, Jon Foulds, chairman of Halifax Building Society, and Peter Ellwood, chief executive of TSB, said separately that there were not enough signs of inflationary pressures in the economy to justify a rise. They also said that any increase would be damaging to the recovery, particularly in its effect on consumer confidence.

A rise in interest rates has probably been postponed until November, City analysts concluded. Although minutes of yesterday's regular meeting between Kenneth Clarke and the Governor, Eddie George, will not be published for six weeks, the Treasury's monthly monetary report yesterday reassured financial markets that an imminent increase was unlikely.

Mr Foulds reaffirmed Halifax's findings last week that UK house prices are static. 'The housing market remains very weak. A recovery in housing is essential to a balanced and healthy general recovery. But consumer confidence lags well behind the upturn shown in official statistics. We are concerned that any rise in interest rates would damage a very delicately poised housing market recovery,' he said.

Mr Ellwood said there were few signs of inflationary pressure in the economy, and he felt reasonably confident that a rise would be resisted for the time being. Fear of unemployment was holding back consumer confidence and therefore economic recovery, and any rise in rates would damage the fall in the unemployment figures.

The Treasury's monetary report said recent data showed economic activity strengthening, yet it also confirmed that underlying inflation was at its lowest for 27 years.

Expectations of inflation measured by surveys by the Confederation of British Industry and by the index-linked gilts market had increased since the previous month, but headline inflation and output price inflation fell while average earnings growth was flat.

The report said growth in national output in the year to April-June was at its highest since the end of 1988. Industrial output and retail sales had shown a strong upward trend. However, analysts said this strength presented no cause for concern.

Simon Briscoe, an economist at SG Warburg, said: 'The Bank's finger is on the trigger, but it would have been hard to justify pulling it yesterday.'

James Barty, UK economist at Morgan Grenfell, said: 'The economy is stronger but there is quite a lot of evidence that tax increases are taking the edge off demand.' The housing market, car sales and spending on household durables were all showing clear weakness.

The warning from Halifax came despite a rise in pre-tax profits by the society for the first half of nearly a fifth to pounds 486m. Provisions against bad debts, including suspended interest, halved from pounds 174m to pounds 67m for the six months to 31 July.

Serious arrears, properties taken into possession and the stock of possessions have all continued to decline in the period, and the fall in provisions would continue for the second half, the society said.

Net mortgage lending, that is new lending minus customer repayments, doubled to pounds 2.1bn compared with the same period a year earlier.

The next meeting at which Mr Clarke and Mr George will reassess interest rate policy has been brought forward to 26 September, before the annual meeting of the International Monetary Fund in Madrid and the UK party conferences. Analysts said a move on interest rates was now most likely after the November meeting.

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