Further mortgage cuts 'unlikely'

BUILDING societies are unlikely to pass any further cuts in base rates on to homeowners through mortgage loan rates, industry leaders warned yesterday.

But the Treasury is expected to signal today that interest rates have fallen far enough anyway, following recent indications of a pick-up in economic activity.

Yesterday Tim Melville-Ross, chairman of the Council of Mortgage Lenders and chief executive of Nationwide Building Society, and Brian Pitman, chief executive of Lloyds Bank, gave evidence to the Treasury and Civil Service Committee, which is questioning banks and building societies about interest rates.

Mr Melville-Ross said: 'The scope for further reductions in mortgage rates is pretty limited. We have to keep savers' funds.'

As rates have fallen, savings rates have suffered, generating criticism from savers. Societies are in danger of losing deposits to higher-yielding investments.

The Chancellor's first monthly report on monetary conditions today is expected to highlight the quickening pace of narrow money supply growth, chiefly cash in circulation, and imply that inflationary pressures risk being revived with another cut in rates.

The report coincides with the Treasury's latest compilation of 26 independent forecasts, for November, which shows a slight downgrading of recovery expectations for next year. Growth forecasts have slipped to an average 1 per cent against the 1.2 per cent average predicted in October.

The Treasury has welcomed the pound's recent modest recovery; some Treasury officials feared that the 3-point fall in rates combined with an almost 15 per cent devaluation, at one stage, was too generous a relaxation in monetary policy. But sterling's recent rise has handed a windfall to Norman Lamont, who declared this week that the pound had fallen far enough, and a further decline threatened a resurgence of inflation. Some Treasury officials fear that a further cut in rates could trigger a fresh fall in the pound.

Narrow money, M0, expanded at an annualised rate of 3 per cent in the year to November. But Treasury officials are concerned that in the latest three months M0 has shot up at a 7.7 per cent rate. In the latest six months, the expansion of 4 per cent hits the ceiling of the Chancellor's 0-4 per cent annual target range.

Meanwhile, next week the Chancellor will talk to top executives from Lloyds, Barclays, National Westminster, Midland and TSB banks about whether they can do more to pass on lower interest rates, and take stock of how banks are treating customers since the row over small businesses first flared nearly 18 months ago.