Lending stokes inflation fears

DIANE COYLE

Economics Correspondent

A surge in bank lending in December, along with signs of an upturn in construction, raised doubts yesterday about the room for further interest rate cuts. But a subdued Confederation of British Industry survey showed that manufacturing remains the weak link in the economy.

Kenneth Clarke, Chancellor of the Exchequer, said last night that he stuck by his forecast that growth would recover this year. ''I believe that the pundits who are being more pessimistic will be proved wrong,'' he said. Mr Clarke added that inflation prospects were encouraging.

The figures taken together suggest that gloom about the economy has been overdone, some City analysts agreed. ''There is now a lot of evidence pointing to a turn in economic prospects,'' said David Owen of Kleinwort Benson, warning that the current pace of lending could signal higher inflation.

Output is growing at the slowest pace for over two years, according to the CBI survey. Andrew Buxton, chairman of the CBI's economic affairs committee, said the survey supported the decision to cut base rates last week by quarter of a point. But he added that there was no urgent need for another cut: ''I don't think we are very close to a recession.''

Some economists said yesterday that the Bank of England would use the strength of lending to argue against further base rate cuts. But Mr Owen said: ''The political imperative is to get rates even lower before the May local elections.''

The CBI's quarterly survey showed that manufacturing remains sluggish. For the third survey running, more firms were pessimistic than optimistic about the general business situation, although by a smaller margin than four months ago. New orders were flat over the past four months and the trend in output weakened.

Companies expect domestic orders to pick up during the next four months. The balance of firms expecting output to rise rather than fall increased to 16 per cent. But the CBI warned this could be partly wishful thinking.

However, total lending by banks and building societies jumped by pounds 6.3bn last month, compared with pounds 3.4bn in November, the Bank of England said yesterday. The figure would have been pounds 1.1bn higher but for a one-off loan repayment to one of the banks by a subsidiary.

The British Bankers' Association, whose members account for about 70 per cent of loans, said demand was up across all sectors. There was a takeover-related jump in energy industry borrowing.