NATIONAL SAVINGS MOVE POINTS TO LOWER U.K. RATES

  U.K. Interest rates look set to move
  lower even after Monday's half-point cut in bank base rates to
  10-1/2 pct, analysts said, citing as evidence the suspension of
  a British National Savings issue yesterday.
      The Department of National Savings, effectively a Treasury
  Department unit, yesterday suspended its 32nd issue, launched
  in October and paying a high tax-free 8-3/4 pct on five-year
  private investments between 25 and 5,000 stg. A spokesman said
  the suspension was just a reaction to yields on national
  savings bonds being way out of line with the rest of the
  market.
      The move was followed by a surprise sell-out within minutes
  today of a Bank of England one-billion stg tap issue, the
  second such issue in as many weeks, analysts noted.
      They said the near-instant sale of the entire new gilts
  issue, for which the Bank of England had required a high 40 pct
  downpayment, was clear evidence that the market thought rates
  had to drop sooner rather than later.
      The sale of the tranche of 8-3/4 pct treasury bonds due
  1997 occurred in an active, bullish gilts market as downward
  pressure on money market rates remained intact, with the
  bellwether three-month interbank rate down 1/8 point at
  10-9-7/8 pct.
       It coincided with another strong sterling rally which
  pushed the pound to four-year highs against the dollar.
      "That government stock disappeared very quickly indeed," said
  Stephen Lewis, head of economic research at stockbrokers
  Phillips and Drew; "It is an indication that the market believes
  rates are going to fall further ... At least by a half-point
  immediately after the budget (on March 17), and some people
  hope for more."
      Stockbrokers James Capel said in a comment the move by the
  National Savings Department was "of considerable significance."
      It said, "the real message ... Is that the decks are being
  quickly cleared so as to facilitate a speedy decision by the
  building societies to cut their rates when the inevitable cut
  in bank base rates to 10 pct materialises."
      Building societies have said a drop in bank base rates
  would normally have to exceed half a point to give rise to a
  reduction in mortgage lending rates.
      Lewis of Phillips and Drew said he too believed the
  National Savings issue suspension may reflect new U.K. Treasury
  policy to point building societies towards a mortgage rate cut.
      "National Savings has been competing too effectively with
  the building societies of late. Building society income has
  been depressed in recent months," he said.
      He and other analysts said Chancellor of the Exchequer
  Nigel Lawson was keen to see mortgage rates fall to keep a lid
  on U.K. Inflation.
      Underlying upward pressure on prices is stronger in Britain
  than in most other Western economies with inflation seen rising
  well above four pct this year and above five pct in 1988 after
  last year's 3.7 pct.
      Emphasising the impact of mortgage rates on consumer
  prices, Lewis said a one-point cut in building society rates
  would reduce inflation in Britain by about 0.4 pct.
      But Lewis and others noted that building societies had been
  complaining to the government about intense competition from
  National Savings, which they argued reduced the scope for early
  mortgage rate cuts.
      "The Chancellor need not be worried about losing some PSBR
  funding from National Savings, but he must be taking the
  building societies' criticism to heart. It looks like the
  National Savings move reflects this," one senior dealer said.
      A Savings Department spokesman refused to comment on this
  interpretation, saying the suspension of the issue was merely a
  reaction to the recent fall in U.K. Interest rates, which had
  pushed yields on national savings bonds way out of line with
  the rest of the market.
      "We are not politically motivated ... Funding was just
  becoming too expensive and we don't need all that money," he
  told Reuters, adding the department had suspended issues at
  least twice in the past, when offered interest rates were above
  or below market rates.
      He said demand for the issue had risen sharply of late as
  U.K. Money market rates continued their steady decline and
  income was threatening to overshoot an unofficial three billion
  stg target set for fiscal 1986 ending March 31.
      In the first 10 months of fiscal 1986, National Saving's
  contribution to government funding totalled 2.72 billion stg,
  compared with 2.01 billion stg in the same period of the
  previous year, official figures show.
      Figures for February, out on Monday, are expected to show a
  further increase of between 300 and 400 mln stg, pushing the
  total for 11 months above target, government officials said.
  

