Legal & General calls for 8% base rate now

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A CALL for an immediate move to 8 per cent base rates came yesterday from the insurer Legal & General, which welcomed Britain's departure from the exchange rate mechanism.

David Rough, who manages L&G's pounds 20bn of investments, said: 'There is a greater chance of averting a severe recession than 48 hours ago.' He saw no benefit at present in going back into the ERM.

He said Britain had taken back economic control and this freedom gave the Government the opportunity to reduce base rates another 2 points from the present 10 per cent. Over the next six to nine months the rest of Europe would join Britain at the lower rate, he believed.

Mr Rough also said the FT-SE 100 index would finish the year sharply up at 2,700 compared with last night's close of 2,483.9. Gilts might weaken initially but would recover. L&G did not expect inflation to rise as a result of leaving the ERM.

L&G was reporting profits of pounds 74m in the first half of the year against a loss of pounds 56.1m a year earlier.

Provisions for losses on mortgage indemnity policies taken out by building societies have been raised by pounds 27m to pounds 185m since the financial year-end. But the insurance losses on the business have fallen back to pounds 26.4m from pounds 88.9m a year ago.

David Prosser, group chief executive, said: 'The effects of mortgage guarantee insurance will continue to be felt. The weakness of the housing market is far worse than anybody forecast.'

L&G has changed the terms on which it takes mortgage indemnity insurance from building societies, leaving more of the risk with them.

Mr Prosser attacked as 'alarmist' critics of endowment mortgages who have been claiming the returns will not be enough to repay the debt at the end of the term. The endowment had served savers well and would continue to do so because the returns were smoothed and helped ride out short-term falls in the markets.

There was 'no evidence of improved consumer confidence and no strengthening of the housing market', so the interim dividend is unchanged.

There was an pounds 82.9m improvement in the general insurance result, down from a loss of pounds 115.9m in the first six months of last year to a loss of pounds 33m so far this year.

There was also a one-off pounds 31.5m profit from the transfer of the group's UK investment businesses to the UK life fund.