Lloyds forecasts rising base rates

BASE rates will rise gently to 6 per cent before the end of 1995, curbing inflation pressures and growth but narrowing the room for tax cuts, Lloyds Bank says today.

The bank's Economic Bulletin for July says the easing expansion in 1995 will in fact be a result of a rebalancing of the economy, relying less on consumption and more on investment. As a result, the Government may have difficulty finding room for net tax cuts. Lloyds projects that in 1995 the public sector borrowing requirement will remain larger than the Government's plans, easing to pounds 32bn in 1995/6 rather than the pounds 28bn forecast by the Treasury this summer and compared with a 1993/4 deficit of pounds 50bn.

The need for higher base rates stems from projections for underlying inflation. The bank forecasts that, excluding mortgage interest rates, the Government's preferred measure of inflation rises to 3.2 per cent by year-end from a current 2.4 per cent. It may rise a little further in January. The main reason, Lloyds argues, is that steep falls in prices last autumn make for unfavourable annual comparisons. This view is shared by other independent analysts. Headline inflation will rise by more, because of higher interest rates, which boost mortgage interest payments.

By the second half of 1995, however, underlying inflation should drop back to current levels under pressure of higher base rates.

'If we are correct, UK gross domestic product growth will become more balanced than for many years. That will make it more sustainable also,' the bulletin says.

Lloyds also forecasts accelerating growth in both exports and imports as the recovery in Europe gathers pace.