Mortgage lenders fail to pass on quarter-point cut

THE BANK of England cut interest rates yesterday for the sixth time in seven months, to a grudging welcome from industry. Rates fell by a quarter-point to 5.25 per cent, their lowest since February 1994.

However, for the first time in the run of reductions since October, few mortgage lenders followed the Bank's move. Virgin Direct matched the cut, but the biggest lenders merely said they would keep their rates under review.

The Monetary Policy Committee's decision sparked a surge of confidence about the economy in the currency markets, where it was seen as a vindication of last month's Budget. The pound climbed until the European Central Bank's surprise move sent the euro soaring.

But many in industry were less optimistic, calling for UK rates to fall even closer to European levels, as they have every time the MPC has acted in recent months.

Kate Barker of the Confederation of British Industry described yesterday's decision as "useful", but added: "A half percentage-point cut would have been justified." Ian Peters, deputy director-general of the British Chambers of Commerce, said: "We must ultimately achieve levels to match our euro zone competitors." However, Ken Jackson of the AEEU engineering union said: "This is good news for manufacturing, but we must be careful not to view interest rates as a panacea."

The City broadly agreed. Robert Barrie of CSFB said: "I can understand manufacturers feeling under pressure, but that has a lot to do with the world economy and not much to do with UK interest rates."

There was no clue from the Bank about future moves, as it issued no statement. Some MPC-watchers saw this as a signal of a split vote.

Most City experts now see little scope for further cuts, expecting rates to level out at 5 per cent by the summer. A final rate cut could come next month, with the publication of the Bank's new inflation forecast.

Some were positively uneasy about the MPC's move in the light of recent upbeat signals on the economy. David Mackie, an economist at JP Morgan, said: "We must be close to the trough. The economy is enjoying a vigorous spring recovery." And Neil Parker of Royal Bank of Scotland said the cut was a "mistake".

The Government's hopes of reaping political benefit from the string of interest-rate cuts have been dealt a blow by the Labour Party's private opinion polling.

It suggests voters believe governments no longer control the economy. "This makes it difficult to pin the blame for the 1981 and 1991 recessions on the Tories. It also means that Labour cannot take full credit for recent falls in interest rates," says a summary of the polling