Lamont expected to cut loan rate before Budget

THE Chancellor is expected to cut base rates before his 16 March Budget to try to bolster prospects for a recovery.

City analysts think he will take advantage of the sharp fall in inflation to 2.6 per cent in December, announced on Friday, and of the rising hopes that German interest rates may soon be lowered.

Speculation that the Bundesbank and the Banque de France were planning an imminent, co-ordinated reduction in interest rates surfaced in financial markets on Friday. The Bundesbank president, Helmut Schlesinger, said last week that there might be some leeway for German monetary policy. Official statistics showed the third consecutive quarterly fall in Germany's national output.

However, the Bundesbank is unlikely to authorise lower rates before the Bonn government agrees a 'solidarity pact' on wages, public spending, taxation and finance for the east with trade unions, employers, banks and opposition parties. The government claimed last week that it was close to a deal, but proof has still to emerge. Nevertheless, some analysts think the Bundesbank could nudge German market rates slightly lower from the current 8.6 per cent at this Thursday's meeting of the central bank council.

The prospect of a German cut next month has fuelled expectations that the Chancellor might cut rates before the Budget. Norman Lamont had been expected to extract maximum political advantage from a reduction in rates, now 7 per cent, by announcing it alongside a tight Budget.

On the domestic front, Mr Lamont can point to comforting inflation trends, with the headline rate (depressed by mortgage cuts) falling close to, and possibly below, 2 per cent. The underlying rate (excluding mortgages) is expected to stay below the Government's 4 per cent ceiling for some time.

Kevin Gardiner, UK economist at Warburg Securities, said: 'The motivation for the next cut in rates is likely to be political. It will show that the Chancellor is seen to be doing something even as the economy slowly starts to turn around.'

Glenn Davies, chief economist of Credit Lyonnais Securities, added: 'Politically there may be not much to gain in cutting rates before the Budget, but I think we will get one when it becomes evident that the recovery is delayed.'

Official UK figures this week will emphasise that recovery is far from entrenched. December retail sales are forecast to rise by 0.5 per cent, when figures are released on Wednesday, and the CBI is expected to release a positive retail survey the day before. But a report out tomorrow by Business Strategies Ltd, based on recent Gallup surveys of consumer confidence, warns the recovery will be 'stillborn' unless sentiment improves soon.

Christmas was a patchy experience for retailers, and car sales, after recent sharp gains, appear to be slipping, BSL says.

Figures for December unemployment, on Thursday, are expected to show a seasonally adjusted rise of 35,000 from the present total of 2.909 million. The rise will confirm fears that the 3 million mark could be breached by the time of the Budget.