Summertime. And the living is easy

The Chancellor, Kenneth Clarke yesterday reduced the cost of borrowing to its lowest for nearly 25 years, bringing millions of homeowners an unexpected bonus. A surprise quarter-point reduction took base rates to 5.75 per cent.

Many of Britain's mortgage lenders followed suit, led by the two biggest, Halifax and Abbey National. The fall in mortgage rates, to their lowest for three decades, will save an average borrower pounds 7 to pounds 10 a month.

Conservative backbenchers, encouraged by improving economic news, speculated that John Major was leaving open the option of calling a snap autumn election on tax cuts and anti-European feeling following the beef crisis.

The volume of retail sales grew for the eighth month running in May, although more slowly than in April.

Retailers' optimism about future sales returned to its highest level since 1988, according to a Confederation of British Industry survey.

Separate figures showed that there were 8.5 per cent more new car registrations last month than a year earlier.

Black Horse Estate Agencies, owned by Lloyds Bank, reported a sudden shortage of properties as thousands of buyers returned to the housing market. Nearly half its branches said they did not have enough family houses on their books.

Other surveys revealed increased optimism among small companies for the second successive quarter and a sharp year-on-year decrease in companies entering receivership.

Yesterday's move, following cuts in interest rates and taxes, will help ensure that growth continues to pick up.

Mike Blackburn, the Halifax's chief executive, said: ''This latest cut represents a further shot in the arm for the housing market.''

Base rates have now fallen four times, in quarter-point steps, over the past seven months.

The latest fall is one of several spurs to to consumer spending, including electricity rebates, maturing Tessas, tax cuts and earlier mortgage reductions. New price controls announced by the regulator, Ofgas, will take pounds 8 a year off the average gas bill.

A new batch of surveys yesterday brought further evidence that the economy is gathering steam.

Mr Clarke termed his move ''sensible'', dismissing suggestions that it had been politically driven. ''I don't take monetary decisions to affect the timing of an election,'' he said.

But disbelievers abounded. The Liberal Democrat Treasury spokesman, Malcolm Bruce, said: ''The Government's inflation target has now been replaced by a re-election target.''

Many City of London commentators were equally sceptical. ''Every Chancellor in the past 25 years has reduced base rates in the run-up to an election. At least Mr Clarke is not alone in letting politics cloud his economic judgement,'' said Alex Garrard, at UBS investment bank.

Most commentators were convinced that Eddie George, Governor of the Bank of England, had opposed the cut. In one sign of disagreement, his monthly meeting with the Chancellor on Wednesday lasted an hour and a half, nearly twice as long as usual.

Only last month the Bank predicted that Mr Clarke was slightly more likely than not to miss his inflation target two years hence - the deadline inflation policy was intended to aim for - if base rates were not increased.

Roger Bootle, chief economist at the City bank HSBC Markets, said: ''The Bank's latest Inflation Report suggests they would have opposed the move strongly, although the Governor is enough of a politician not to have gone out on a limb.''

Mr Clarke emphasised the absence of any cost pressures behind yesterday's cut, which came the week before his annual Mansion House speech on monetary policy. A significant minority in the City agreed that the stronger pound and low inflation justified lower interest rates.

The Shadow Chancellor, Gordon Brown, focused on the weakness of manufacturing. "The Chancellor has cut rates because growth and business investments are depressed and manufacturing is now technically in recession,'' he said.

Business leaders broadly welcomed the move, but some of them were concerned about the possible need for an increase in interest rates later in the year.

Clarke versus George, page 15