Critical MPs want lower rates

DIANE COYLE

Economics Correspondent

New evidence yesterday that inflation is on the retreat boosted the prospect of another cut in interest rates. This could take place as early as tomorrow, after the first monetary meeting between the Chancellor of the Exchequer and Governor of the Bank of England since the new year, and is widely expected within the next two months.

The favourable news on manufacturers' prices last month came on the same day that MPs on the House of Commons Treasury Select Committee expressed doubts whether the Treasury's Budget forecast of 3 per cent growth this year could be achieved without reductions in interest rates.

William Waldegrave, Chief Secretary to the Treasury, defended the economic record. "There is more good news ahead," he promised, referring to last month's base rate cut.

The MPs' report said the Bank of England's cautious policy stance "does not assist" its credibility. It said the Bank's views would be discounted if it was consistently pessimistic about inflation.

The slippage in plans to bring public borrowing down to zero was the "biggest disappointment" about the Budget, the cross-party committee said. It also accused the Treasury of wishful thinking about the housing market, in predicting - for the second year running - a recovery in prices and sales.

The Royal Institute of Chartered Surveyors yesterday reported an improvement in housing market activity in the final quarter of last year. Estate agents reported a more upbeat mood among buyers and sellers. But Woolwich Building Society said the number of homeowners with negative equity, where their property is worth less than their mortgage, increased by 40,000 to an estimated 1.16 million in the last three months of 1995 compared with the previous three.

The increase was due to a 0.6 per cent fall in house prices between the two quarters. Woolwich added there were tentative signs the housing market might be beginning to improve.

Peter Robinson, group chief executive, said: "House prices are predicted to rise around 2 per cent, which should remove around 250,000 households from the negative equity trap."

Building societies are likely to reduce mortgage rates again even without the trigger of a fall in base rates, according to Robert Thomas, an analyst at investment bank UBS. "Building societies are coming under pressure to come up with better rates for customers. They are generating a lot of profits and have to start giving some of it back," he said.

Following recent statistics showing that manufacturing output was flat in November, yesterday's figures brought favourable news on the inflation front.

The headline increases in both prices manufacturers paid for inputs of materials, up 1.6 per cent, and charged at the factory gate, up 0.8 per cent, were disappointingly high last month. But an upward blip in oil prices and higher excise duties imposed in the Budget explained most of these jumps.

The underlying news was much better. The year-on-year rate of increase in input prices fell to 5.8 per cent, its lowest for 18 months. The annual rate of "core" factory gate inflation, excluding food and energy, fell to 4.3 from 4.6 per cent in November. Retail price inflation tracks this core rate with a lag of six to nine months.

Although most City economists think an interest rate move is more likely in February or March, few will rule out a surprise early cut.

Data on retail and factory gate prices, earnings, unemployment and retail sales are due this week.