Mortgages fall as Lamont cuts interest rates

FURTHER cuts in British interest rates are expected by the end of the year, following the Chancellor of the Exchequer's decision yesterday to reduce base rates by one percentage point to 9 per cent, the lowest since June 1988.

Norman Lamont's move means that mortgage rates are heading below 10 per cent for the first time in four years. Two building societies announced new rates immediately while others say they will take a few days to fix the exact rate and timing of the change for existing borrowers.

Most societies are expected to cut their rates by 0.75 percentage points. This will reduce the rate to 9.95 per cent and bring down the monthly cost of a pounds 60,000 loan by pounds 32.82 to pounds 435.31.

City economists believe interest rates could be down to 8 per cent or lower by the end of the year, with the next cut likely in the run- up to next month's Conservative Party conference. Combined with the fall in the pound following Britain's departure from the European exchange rate mechanism, this should help to lift the economy out of recession. But the weaker pound and lower interest rates may threaten higher inflation in years to come, they warned.

The Chancellor said the cut in interest rates was justified by falls in inflation and he warned that interest rates could be increased if that was jeopardised. 'Being outside the Exchange Rate Mechanism is not a free lunch and is not intended to be a free lunch. We have got to keep on top of inflation,' he said.

Gordon Brown, Labour's shadow Chancellor, said the Government's economic policy was in total confusion, with the cut in interest rates following last week's 5-point increase.

Sterling's exit from the ERM has allowed British interest rates to fall below those in Germany - the ERM's anchor economy - for the first time in more than a decade.

In an effort to reassure financial markets that the Government was not 'going for growth' at the cost of higher inflation, the Treasury announced the issue of an index-linked Government security, which will be more expensive to repay if inflation rises.

Mr Lamont's move came as Britain recorded its worst underlying trade deficit since the start of the recession. The shortfall between imports and exports, excluding oil and erratic items, was wider in August than at any time since the start of the recession. Economists believe a devaluation-induced rise in import prices will make the trade gap balloon dramatically in the next couple of months.

The cut in interest rates increased pressure in Westminster and the City for Mr Lamont to give more details of the Government's economic strategy outside the ERM. Some City economists hope Mr Lamont will use tomorrow's emergency debate on the economy in the Commons to announce the publication of a new target for the amount of money circulating in the economy, against which anti-inflationary policy could be judged.

But it is understood that the Bank of England is strongly opposed to the reintroduction of a broad money supply target, which was last used in the early 1980s. Mr Lamont has so far said he will look at various measures of money supply, asset prices (including house prices) and the exchange rate in determining interest rate policy.

The Leeds Permanent, Britain's fifth largest building society, announced an immediate 0.75 per cent reduction for new borrowers, while Northern Rock was the first to cut rates when it moved its mortgage rate down by 0.76 percentage points to 9.99 per cent.

The Halifax, Britain's largest mortgage lender with 19 per cent of the market, has yet to decide where to pitch its rate. A spokesman said: 'This is good news for the housing market. We will be cutting our mortgage rate but we want to see how the money markets settle before deciding by how much. We will take full account of the interests of our savers.'

Robin Leigh Pemberton, Governor of the Bank of England, delivering a speech in Washington at the International Monetary Fund meeting on behalf of Norman Lamont, said that the Government remained 'absolutely committed to the progressive achievement of price stability'.

He said that sterling's suspension from the ERM 'emphatically does not represent a shift in the fundamental orientation of our policies'. But he refused to comment on yesterday's rate cut.

----------------------------------------------------------------- MONTHLY REPAYMENTS ----------------------------------------------------------------- Endowment Mortgage Loan 10.70% 9.95% (pounds 000) (pounds) (pounds) 30 200.63 186.56 50 378.96 352.40 60 468.13 435.31 100 824.79 766.98 150 1,270.63 1,181.56 200 1,716.46 1,596.14 Excludes endowment premiums -----------------------------------------------------------------