Base rate on hold in spite of mortgage cut

Economy: Statistics suggest no change in cost of UK borrowing while jobs figures fox Wall Street

DIANE COYLE

Economics Correspondent

Lower mortgage rates announced by lenders Abbey National and the Northern Rock building society yesterday put financial markets in a party mood. But the latest batch of statistics on the British economy suggested there would be no change in base rates when Kenneth Clarke, Chancellor of the Exchequer, holds his monthly policy meeting with Eddie George, Governor of the Bank of England, next Thursday, City analysts said.

"Interest rates are on hold for a time and there will be a cut in the new year if nothing goes wrong before then," Roger Bootle, chief economist at HSBC Markets, said.

Some City economists thought there was a chance of an earlier reduction in base rates. David Owen, of Kleinwort Benson, said: "The Chancellor's position will be quite clear next week, and he might even bully the Governor into considering an interest rate cut."

The FT-SE 100 share price index ended 31.6 points higher at 3,509.4 and gilts prices leapt a point after the announcement of the mortgage reductions.

In the initial euphoria the level of base rates expected by the short sterling futures market, which trades on future interest rate movements, fell below the base rate level of 6.75 per cent.

Figures on manufacturing, trade and borrowing yesterday filled in details of the emerging picture of slower growth and receding inflationary pressure, supporting Abbey's rationale for its decision. The bank said it believed inflation was steady and bank rates would remain low.

There is no doubt that the housing market is stuck in the doldrums. Bank of England figures yesterday confirmed that mortgage borrowing of pounds 932m in July was the lowest since the monthly figures began in April 1993. Nationwide building society's index showed house prices were flat between July and August, and 0.9 per cent lower than the same month a year earlier.

There was encouraging news on the inflation front. The August survey of purchasing managers showed the index of prices paid for inputs in manufacturing fell sharply to 62.2, its lowest level since May 1994.

Peter Thomson, director general of the Chartered Institute of Purchasing and Supply, said: "The most encouraging news from purchasing managers this month is that many input prices - although still high - seem to have peaked."

Lower price pressures were most evident for paper, plastics and packaging, which had all seen steep increases.

There was evidence that supply bottlenecks had eased, too. The CIPS reported that fewer manufacturers faced supply difficulties than at any time since March last year.

Output increased for the 33rd successive month, according to the survey, but slowed to its weakest rate since September 1992. The index of new orders rose, leaving the overall activity index unchanged from July at 52.1.

Separate figures on Britain's deficit in trade in goods in June were disappointing. The headline shortfall improved from pounds 1bn in May to pounds 868m in June, partly because of a lower deficit with EU partners but partly because the May deficit was revised for the worse. The underlying deficit, excluding oil and erratic items, remained roughly unchanged at pounds 1.4bn.

The Treasury said the trend in trade remained flat. Brian Wilson, Labour's trade spokesman, said: "It is alarming that with conditions favourable for exporters we are still clocking up these huge monthly trade deficits.''

Underlying export growth between the first and second quarters fell to 3 per cent with import growth up to 4 per cent.

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