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THE OUTLOOK FOR INTEREST RATES

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Chancellor Kenneth Clarke and Bank of England governor Eddie George meet on Thursday for their regular monetary mee...
Chancellor Kenneth Clarke and Bank of England governor Eddie George meet on Thursday for their regular monetary meeting to discuss UK monetary policy. Most economists now assume that rates will remain at 6.75% for the time being, and probably until the direction of fiscal policy is confirmed in this year's budget.

Friday's move by the Abbey National reflects this feeling. The surprise action by the UK's second largest mortgage lender saw home loan rates cut by 0.35% to 7.99%.

The Abbey said the move reflected a belief that the government was unlikely to raise interest rates further this year. Northern Rock, the eighth largest building society, was the first to follow the Abbey's move to 7.99%, with a cut of 0.55% in its home loans rate. The Halifax, the UK's largest mortgage lender, is expected to make a decision about whether to cut its current rates from 8.35% early in the week

The chancellor should feel very happy about the changing sentiment amongst mortgage lenders and City traders. The debate over monetary policy has raged since May, with Mr Clarke steadfastly ignoring the governor's advice to raise rates in order to achieve an underlying inflation target of 2.5%.

Recent economic data has also swung in Mr Clarke's favour. Sterling has risen on the foreign exchanges, easing inflationary pressures from imports. The latest Purchasing Manager's survey also reported the rate of price increases in industry easing significantly. The growth rate of total mortgage borrowing has also slowed, amid a slump in new mortgage lending in July.

However, even though the market expects a period of interest rate stability for the remainder of this year, in the longer-term interest rates are still expected to rise. This widely held view partly reflects political uncertainty in the run up to the next general election (which must be held by spring 1997), but also reflects unease in the City about the longer-term economic outlook.

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