Rates cut to stifle revolt: Miners' redundancy package increased to soothe nerves of disaffected Conservatives

THE GOVERNMENT yesterday replied to growing criticism of economic and political drift with a 1-point cut in interest rates and an eleventh-hour attempt to stave off a Commons Tory revolt next Wednesday over pit closures.

John Major said after the conclusion of the EC summit in Birmingham that those who criticised him for a lack of leadership should not attack him for taking a decision on the coal industry that 'everybody would wish to avoid'.

He also revealed the miners' pounds 1bn redundancy package would be bolstered by a special programme of retraining through local Training and Enterprise Councils - though he did not say how much extra money would be involved.

That is unlikely to damp down one of the most deep-seated Tory backbench protests since the poll tax, and Mr Major last night significantly refused to rule out a retreat. Asked about the possibility of a phase-in or amendments to the closure programme, the Prime Minister said cautiously: 'I don't anticipate any.'

The Yorkshire Post reported that a survey it conducted of 72 Tory backbenchers found 47 who wanted the programme partially reversed or phased.

That could well happen if a concerted defence of the government case by Michael Heseltine, President of the Board of Trade, fails to win over the Tory rebels currently threatening the Government with outright Commons defeat on the controversial pit closure plans.

Yesterday's cut in interest rates to 8 per cent set mortgage rates falling to a 20-year low. The basic mortgage rate is settling at 9.25 per cent, 1.45 percentage points lower than the current rate.

Most lenders were already planning to give mortgage-holders a cut next month, and will now provide another in December. Others, such as the Abbey National, will wait until December. The City welcomed the cut in base rates, but believed it was prompted by political panic. Economists said the Chancellor might cut rates again before Christmas in an attempt to prevent fears of a slump in Britain from becoming self-fulfilling.

There was some concern in the City that the move was at odds with an apparent signal earlier this week from the Bank of England that it did not wish to see an early cut in rates. But Mr Lamont was at pains yesterday to emphasise the rate cut was 'fully consistent with the Government's inflation objectives'. In an unprecedented move, the Treasury issued a detailed explanation of why a base rate cut was appropriate. Officials said this heralded the greater openness in economic policy promised by the Chancellor (see left).

Mr Lamont pointed to falling house prices and slow growth in the amount of money circulating in the economy as evidence that the rate cut would not boost inflation unacceptably. He added that the pound's current level - 17 per cent below its former central rate in the exchange rate mechanism - was consistent with the Government's goal of reaching 2 per cent underlying inflation by the end of the current Parliament.

The Government had decided to make the cut shortly after last month's reduction to 9 per cent, but the timing was decided by the wave of gloomy economic news this week. Officials feared that mounting pessimism would, in itself, further weaken the economy. The Chancellor said British industry could now 'look forward with confidence to a pick-up in domestic and overseas sales'.

Nigel Richardson, of Warburg Securities, said: 'It is clearly desirable and necessary, but the timing is odd. They could have done this at the beginning of the week.' Michael Hughes, chief economist of Barclays De Zoete Wedd, said: 'This is a different policy, it smacks more of political panic than economic planning.'

There were fears that further reductions could provoke a new run on the pound, although yesterday's cut prompted a fall of less than 2 pfennigs against the mark to DM2.4470. The FT-SE index of 100 leading London shares closed 17.3 points higher at 2,563.9. Tory MPs saw the cut as too little, too late. They had been hoping for a cut of 2 per cent, and were confused by the conflicting signals being sent by Cabinet ministers. 'We were told last week that it was not prudent because it would increase inflation. Now it's OK. There is total confusion about what is going on. We are pretty fed up with the whole mess,' one ministerial aide said.

Thatcherites saw it as a clear shift by the Chancellor towards a policy of allowing the pound to float freely, and away from the emphasis he placed on the sterling rate level in evidence to the Treasury select committee on Monday.

The Abbey National is cutting its basic mortgage rate to 9.25 per cent with loans over pounds 60,000 at 9.05 per cent and loans over pounds 100,00 at 8.85 per cent. The Abbey had already scrapped its November cut to implement a cut in December in anticipation of a 0.5 per cent cut in base rates. The Halifax said it was going ahead with its cut in November to 9.99 per cent, but that would be followed by another cut in December.

Northern Rock and National & Provincial building societies have also cut their rates to 9.25 per cent. The change takes effect immediately for new borrowers and from December for existing borrowers.

Leading article, page 12

Economic crisis, pages 2, 3

Mortgage disappointment, page 19

Property, page 37

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