The dilemma facing Kenneth Clarke, the Chancellor, over whether to raise interest rates next week when he meets Eddie George, the Governor of the Bank of England, was sharpened still further yesterday by new figures showing the extreme fragility of the housing market.
Mr George is expected to advise that a rise in rates is needed to compensate for the effective loosening of monetary policy brought about by the recent fall in the value of the pound. However, the latest statistics from the building societies showed that the housing market is in severe difficulties, even although most mortgage lenders have not passed on the last rate rise in February.
The monthly average of new mortgage commitments - offers by the building societies to lend money to house-buyers - fell in the first three months of the year to 46,000 a month from an average of 50,000 in 1994. New commitments from building societies are a forward pointer to total turnover in the market which declined in March by 6 per cent on the year before. Since building societies are thought to be gaining market share on banks, the new figures for commitments would appear to point to a further decline in completions.
With a further slash in mortgage tax relief coming into effect this month, the market is on "a new downward leg", according to Ian Shepherdson, economist at HSBC Greenwell. This view was shared by other City analysts. "There remains no sign of relief for the distressed housing market," said Ciaran Barr, economist at Morgan Grenfell.
So far the majority of mortgage lenders have not passed on February's rise in base rates. However, a further rise is expected to force their hand, with rates rising for investors and borrowers. The margin between rates for borrowers and depositors is currently 2.0 per cent, down from 2.3 per cent a year ago. While critics maintain that there remains scope for the societies to squeeze the margin still further, borrowers should not rest their hopes on further relief on this front.
While the housing market continues to suffer, there was evidence that industrial investment is at last beginning to pick up.
In the first quarter of the year, manufacturers, who have been repaying debt during the recovery, borrowed more than £500m from British banks, excluding the distorting effect of the financing facility raised by Glaxo to pay for its bid for Wellcome.
This is estimated to have added about £6bn to provisional estimates for M4 lending in March released by the Bank of England. Stripping this out, M4 lending was down on February.