Eddie George, the incoming Governor, said that hopes of further cuts were based on the conviction that inflation was no longer a threat. 'I have to say, frankly, that reports of the death of inflation are greatly exaggerated.'
He said the markets were unconvinced inflation has been quelled and if the 1-4 per cent target for underlying inflation were threatened, 'we will have no hesitation in recommending the appropriate monetary response'.
As Mr George insisted that long- term control of inflation was the best basis for sustained recovery and low rates, the Treasury expressed growing confidence in its latest monthly monetary report that the chances of a further sustained climb in unemployment were receding, and prospects for the economy continue to improve.
The pound meanwhile staged a modest recovery after the financial speculator, George Soros, said he expected the German mark to fall against all important currencies, including sterling.
The housing figures showed that builders started work on 9 per cent more houses in the first four months of the year than in the same 1992 period, and confirmed reports from builders, lenders and estate agents that buyers are starting to return to the market. After adjustment for seasonal influences, private housebuilders began work on 46,800 houses in the four months to April compared with 42,900 the previous year. The quarter-on-quarter increase was even more marked, with 20 per cent more houses started in the three months to April compared with the previous quarter.
Including housing association and local authorities, total housing starts were 55,000 in the first four months, up 13 per cent on the previous year.
The statistics, released yesterday by the Department of the Environment, were welcomed by lenders and builders as confirming the anecdotal evidence that buyers are back.
Joe Dwyer, chief executive of Wimpey - Britain's second-largest housebuilder - said that its sales volumes had been picking up strongly, allowing it to remove some of the incentives it used to entice purchasers. 'There has been some slackening very recently, but that is largely seasonal and demand should pick up again in the autumn.'
Tony Pidgley, chief executive of housebuilders Berkeley Group, said that many of his houses were being snapped up before work had started, which suggests that the industry could start to run out of stock. 'It should be a good steady recovery,' he said.
Commenting on the economy as a whole, the Treasury report said that while it was still too early to say that rising joblessness had come to an end 'the likelihood of sustained increases in unemployment in the months to come recedes with each monthly fall.'
Sterling, meanwhile, was one of several currencies that strengthened against the mark yesterday, after Mr Soros's remarks. The pound gained 1.35 pfennigs to DM2.4775, while the dollar also advanced, by 1.3 pfennigs to DM1.6370. But both currencies closed below their best levels and sterling fell slightly against the dollar, to dollars 1.5142.
Top Bundesbank officials yesterday countered Mr Soros's criticism of excessively tight German monetary policy. Helmut Schlesinger, the Bundesbank president, strongly suggested any weakness of the mark would slow the pace of rate reductions while his deputy, Hans Tietmeyer, warned that the Bundesbank would not tolerate a devaluation of the mark.
John Hall, of Swiss Bank Corp, said: 'The markets have already been strongly testing the idea that the mark is losing its ERM anchor role. Mr Soros jumped on the bandwagon but the mark's losses have been limited.'