Interest rates remain under pressure

THE Government won its battle to hold down mortgage rates last week, but lenders are warning that their interest rates remain under review and could still rise.

'Unless something changes substantially the building societies will have to raise their savers rates and mortgage rates by the autumn,' said John Bayliss, general manager of the Abbey National, Britain's second-largest mortgage lender.

A spate of rate changes last week was triggered by the Skipton Building Society's 0.5 per cent increase in its home loan rate. Most other societies, however, lowered their saver's rates - despite continuing huge outflows of investor's funds - in order to increase their profit margins.

Despite a more conciliatory tone on mortgage rates, the pressures on building societies have not changed. They are believed to have suffered a total net outflow of savings in July of nearly pounds 500m, compared with pounds 340m in June.

National Savings, meanwhile, took in gross deposits of pounds 950m last month, official figures show today. The high rate of inflow is likely to continue when it launches a new series of savings products in a week's time.

Savers bought nearly pounds 300m of National Savings' tax-free First Option Bonds between their launch on 7 July and the end of the month. The Treasury cut the rate offered on the bond by 0.7 percentage points within a fortnight of its launch, in a bid to forestall a wave of mortgage rate rises.

However, pressure is building for a rise in general interest rates as sterling continues to come under heavy pressure in the currency markets. Dealers are steeling themselves for a further decline this week after the pound closed on Friday at its lowest point against the mark since joining the exchange rate mechanism nearly two years ago.

It ended the week at DM2.1850 in London, despite central bank intervention,leaving it only 4 pfennings above its absolute floor against the German currency.

Despite last week's news of a continuing fall in inflation, the currency markets remain pessimistic about the UK economy.

Tentative evidence that the recession may have flattened out, however, is expected to emerge this week from official figures and in the Bank of England's latest Quarterly Bulletin.

Excluding North Sea oil production, figures for national output are set to show a small rise in the second quarter, for the first time since the downturn began.

The Bank is expected to argue that some encouraging trends may have emerged. Even if this does not amount to unambiguous evidence of recovery, the economy could be improving.

However, the gross domestic product figures released on Wednesday are expected to disclose that if North Sea oil production is included, there was a small decline in national output.