Mortgage war set for further escalation

DIANE COYLE

Economics Correspondent

The mortgage price war is poised to intensify this week if the Chancellor, Kenneth Clarke, lives up to expectations by cutting a quarter point off base rates after his meeting with the Governor of the Bank of England on Thursday.

However, many of the big lenders are expected to offer selective mortgage discounts rather than reducing their basic variable rate.

Banks and building societies that are planning a stock market listing are reluctant to compete head-on with Nationwide's recent cut in its mortage rate to 6.99 per cent, announced to demonstrate to its members the benefits of remaining a mutual society.

A spokeswoman for Alliance & Leicester, which announced its plans to convert and join the stock market early last month, said: ``The mortgage market is so competitive that the standard rate is only one part of a marketing strategy.'' Alliance would review its strategy if base rates fell this week, she said, adding that the interests of savers had to be taken into account as well.

Smaller mutual societies such as Skipton and Bradford & Bingley have already welcomed Nationwide's move and are expected to announce new measures shortly, even if base rates do not fall this week.

However, most analysts in the City firmly expect the Chancellor to shave rates by another quarter point, taking them to 6 per cent, following earlier reductions in December and January.

Manufacturing industry is stagnating according to recent evidence, while the economy's pace of growth has slowed to well below its long-run trend.

The Bank of England is not expected to resist a reduction in borrowing costs. Last month it lowered its inflation forecast, and said the Government was more likely than not to hit its inflation target.

Official figures for the narrow money measure M0, due today, and unexpected turbulence in the financial markets present the main potential obstacles to lower borrowing costs.