Mortgage cuts will bring rise in prices

Hope of rate cut is clear sign of recovery

DIANE COYLE

and PAUL WALLACE

The prospect of lower interest rates following the recent sharp rise in house prices is the clearest sign yet that a recovery in the housing market is under way for the first time in five years.

After years of gloom, Britain's 16 million home owners face the virtual certainty of lower borrowing costs and rising house prices.

The chances that the Chancellor, Kenneth Clarke, will cut base rates after his meeting with the Governor of the Bank of England, Eddie George, on Thursday were raised yesterday by news that manufacturing is in recession and inflationary pressures are vanishing.

At the same time a sharp rise in house prices last month gave the clearest sign so far of improved prospects.

Mr Clarke's scope for reducing borrowing costs was also helped by further signs of economic weakness in the US, increasing the likelihood that interest rates will fall across the Atlantic and elsewhere later this month.

London's financial markets regard a quarter-point reduction in the level of base rates to 6 per cent after the forthcoming monetary meeting as a racing certainty. The Bank is thought to be unlikely to object to a third reduction in four months even though Mr George advised delaying January's move.

Lower mortgage rates would almost certainly follow, helping boost the housing market further.

The Treasury said the Chancellor would make his decision on all the evidence. "It doesn't do to focus on one sector of the economy at the expense of others," a spokesman said.

Nevertheless, interest rate hopes took share prices higher yesterday, with the FT-SE 100 index ending just over 25 points higher at 3752.7.

House prices jumped 1.4 per cent in February according to the Nationwide building society's index. This took them to a level 0.9 per cent higher than a year earlier, the first time since last April that prices have risen year-on-year.

The Halifax's index, due on Monday, is also expected to show an increase in prices in February.

''We cannot expect this kind of increase every month, but the housing market is definitely recovering," said Ian Shepherdson, a housing expert at HSBC Markets.

The Nationwide said the trend pointed to a "modest" recovery. A spokesman, Philip Williamson, said: "We are confident that recent signs of improvement will mark the begin ning of a moderate but sustained recovery in the market."

A base rate cut would lead to further reductions in the cost of home loans, already at their lowest level for more than 30 years. The Nationwide raised the stakes in the mortgage war by cutting its standard variable mortgage rate to 6.99 per cent just over a week ago. Its competitors are under pressure to follow its example.

Separately, the influential monthly purchasing managers' survey of manufacturing showed industry moving into recession last month. It also reported a sharp fall in the prices index, to its lowest for more than three years. "The contents of the survey are extremely helpful to the Chancellor and make a rate cut odds-on," said Simon Briscoe, a City economist at Nikko Europe.

The purchasing managers' index of manufacturing activity fell below 50 - the dividing line between expansion and contraction - for the first time since November 1992.

In its biggest plunge for four years, the survey's prices index fell from 49.1 to 44.4, the lowest since January 1992. This raised hopes that manufacturers may soon be paying less for their inputs of materials.

The consumer goods industries, which make up almost one-third of manufacturing, were more buoyant than a depressed investment and intermediate goods sector. "The figures for the consumer sector were relatively good," said Peter Thomson, director-general of the Chartered Institute of Purchasing and Supply. "The question is whether the rest of the manufacturing sector will follow."

The decline last month was centred in the investment and intermediate goods industries. Deteriorating order books in these sectors swamped a further small pick up in consumer goods sector.

A further sign of weakness was that the employment index was below the 50 watershed, pointing to job cuts, for the second month running.