Lenders agree to hold down mortgage rates

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LEADING mortgage lenders indicated yesterday they would resist raising mortgage rates for the time being after the Government cut the interest rate on its successful First Option National Savings Bond. The success of the bond, launched on 6 July, had deprived building societies of deposits.

Cheltenham and Gloucester said it would reverse last Friday's decision to increase its mortgage rate while Alliance and Leicester, which had been poised to raise its rate, said it would not now do so.

Abbey National said it had no current plans to raise its rate but would keep the situation under review. The news helped to spur a modest rally in share prices, which were also helped by the lingering effects of Monday's concerted central bank intervention aimed at halting the dollar's slide.

The FT-SE 100 index closed up 11.9 points at 2,415.6 after rising more than 22 points at one stage.

From Saturday C&G's mortgage rate will return to 9.75 per cent from 9.99 per cent. Its savings rates will also drop back to their former levels.

Andrew Longhurst, chief executive of C&G, said: 'I am pleased that the Government has recognised that setting high street interest rates at too high a level forces up mortgage rates and now has taken action to protect borrowers and the housing market.'

He added that the society wanted greater freedom to raise funds from the wholesale markets. Building societies are limited to raising 40 per cent of their funds from the money markets.

Despite the relief over mortgage rates, the pound failed to gain ground against the mark, closing virtually unchanged at DM2.8397. Sentiment towards sterling remained bearish because of continued worries over the criticism by Tory backbenchers of the Government's uncompromising opposition to devaluation.

The dollar, meanwhile ,retreated slightly after Alan Greenspan, chairman of the Federal Reserve, failed to provide any support for the US currency in his semi-annual report to Congress. However, after the London close, he said he saw no benefit in a depreciating dollar.

Mr Greenspan avoided any reference to monetary policy in the Fed's report or in his testimony afterwards. Analysts took his silence as a skilful effort to sidestep suggestions that the Fed might ease monetary policy again to revive the economy, which could have undermined the dollar.

Nevertheless, this week's central bank intervention appears to have placed a floor under the US currency and speculators are wary of pushing it much lower.

The dollar ended little changed at DM1.4855 but down about 1.5 pfennigs from the day's high. Against the pound, the dollar gained 0.6 cents to dollars 1.9095.

The Fed chairman delivered a cautious analysis of the US economy. He expected it to pick up strength soon, although the current growth rate was inadequate to curb the unemployment rate. He said businesses and consumers were well beyond the halfway point in reducing the debt built up in the 1980s, one of the main constraints on resumption of growth.