David Gilchrist, group general manager of the Halifax Building Society, Britain's largest mortgage lender, said: 'This is welcome news and reduces some of the competitive pressures on interest rates. But competition still exists.' Other leading lenders said that their mortgage rates were also still under review.
The Government has acted a fortnight after it was forced to cut rates on the successful National Savings First Option Bond to stop other building societes following the Cheltenham & Gloucester's lead in raising home loan costs.
Andrew Longhurst, chief executive of the C&G, said: 'This alone will not revive the housing market. It is just tinkering round the edges. As far as the mortgage rate is concerned there needs to be absolutely fundamental intervention from the Government to do something.' The Treasury emphatically denied that the rate cuts were in response to threats from the building societies. Officials said the decision had been taken last week because National Savings had been unexpectedly successful in attracting funds to help to finance the widening gap between government spending and tax revenue.
National Savings contributed about pounds 600m to funding the budget deficit in July, bringing the total for the first four months of the financial year to pounds 2.1bn. This is substantially higher than at the same point last year, with just pounds 3.1bn being raised during 1991-92 as a whole.
The Treasury's forecast of how much the Government will have to borrow this year has been rising steadily as the economy has stubbornly refused to recover. The delayed recovery means lower tax revenues and higher spending on unemployment and other benefits.
The Treasury's Budget forecast was that the Government would need to borrow pounds 28bn during 1992-93. Officials now believe the figure will be well over pounds 30bn.
City economists were in no doubt that the Government had cut National Savings rates in an attempt to forestall widespread rises in mortgage rates. 'The fact that this move has come so quickly after rates were cut on the First bond suggests the Treasury is really rattled', said Kevin Gardiner, economist at S G Warburg.
But he added that lower National Savings rates might not be sufficient to halt mortgage rate rises, because the banks and building societies also faced tough competition for savings from shares and life assurance companies.
Banks and building societies have suggested a number of schemes over the past week to revive the housing market and help to pull the economy out of recession. Mr Gilchrist called for the Government to state whether it was willing seriously to consider any of them. However, Whitehall sources suggested last night that none of the schemes was likely to be adopted.
Yesterday the Halifax released figures showing that house prices fell by 0.4 per cent last month after small increases in May and June. Prices fell by 5.2 per cent over the year to July. The statistics indicate prices are sliding again after some signs of a recovery in the spring.
Building societies are expected to announce shortly that they suffered another net outflow of savings last month similar to the pounds 314m they lost in June. Yesterday the Council of Mortgage Lenders released figures showing the continued sluggish demand for mortgages.
National Savings has withdrawn the 37th issue of National Savings Certificates, its flagship product which was paying a fixed rate of 8 per cent tax-free over five years. It will be replaced by a 38th issue paying 7.5 per cent, going on sale to new investors on 24 August.
Those reinvesting proceeds from matured certificates can, however, do so from today.
The rates on Capital Bonds, Children's Bonus Bonds and Income Bonds are also being cut.
The cuts saw the pound suffer a bout of jitters in late trading, falling below DM2.83 and within 5 pfennigs of its ultimate floor in the European exchange rate mechanism. Dealers were also nervous that the Bundesbank might raise its key Lombard interest rate later this month, which would almost certainly trigger a wave of interest rate rises across Europe, including Britain.
The move was broadly, although not over-enthusiastically, welcomed by politicians of all parties. John Townend, chairman of the Tory backbench finance committee, said: 'I think it is a move in the right direction and removes the immediate danger of an increase in mortgage rates. I would hope that the Government is also looking at a package to help the housing market.' He added that the move might suggest the Government was no longer 'fully funding' the budget deficit from borrowing outside the banking sector, in an attempt to boost the money supply. But the Treasury said funding policy was unchanged.
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