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Pound drives home Clarke's dilemma

Export orders have started to suffer because of the strength of the pound, according to a survey published by the Confederation of British Industry yesterday. But separate figures showing strong mortgage demand highlighted the Chancellor's dilemma over interest rates.

Eddie George, Governor of the Bank of England, signalled earlier this week that he had advised higher borrowing costs to tame consumer demand despite the recent rise in the pound. Mortgage figures from the Building Societies' Association, showing that new lending grew nearly 50 per cent last year, underlined the Bank's concerns yesterday.

However, the CBI said the decision was "finely balanced". Ross Buckland, chief executive of foods group Unigate and a member of the CBI's economic affairs committee, said: "We say, looking at all the elements, that no interest rate rise is justified at present."

Paul Mortimer-Lee, chief economist at investment bank Paribas, said: "It is a choice between two evils. Either interest rates are going to be too low or the exchange rate is going to be too high."

The CBI's quarterly survey of manufacturers showed that export orders had levelled off for the first time since October 1993. Manufacturers' optimism about exports had also fallen.

The survey showed output had grown steadily over the past four months, although its rate of growth had slowed. General business optimism was steady, and there was a sharp rise in the balance of companies expecting to increase rather than reduce their prices. Domestic demand for consumer goods in particular was still improving.

Fresh evidence of the housing market recovery came from the Building Societies Association. It said net lending in 1996 reached pounds 13.24bn, up 48 per cent on the previous year.

In the final quarter of last year, societies' net advances, at almost pounds 4bn, were 95 per cent up on the fourth quarter of 1995. Although net advances dipped slightly to pounds 1.2bn in December, they were up 50 per cent on the same month last year.

The British Bankers' Association said mortgage lending rose by pounds 552m, compared with pounds 606m in November and a six-monthly average of pounds 571m.

But Dharshini David, UK economist at HSBC Markets, said seasonally adjusted net new commitments, the amount of future lending pledged by building societies, was expected to reach 48,000 in December, the lowest in five months.

"The figures reveal tentative signs of a weakening of mortgage demand," she said. "This could reflect the disappearance of many fixed-rate mortgage packages following the base rate rise on 30 October."

Separate figures showing an unexpected drop of pounds 3.8bn in total bank lending in December muddied the picture. Even though a large part of the fall was due to end-of-year transactions in gilts, underlying loans were weak. The growth rate of M4, the broad money measure, fell to 9.6 from 10.8 per cent in November.