UK house prices drop, Brown says rates can be cut

UK house prices fell sharply in March, hardening expectations of an interest rate cut this week and prompting unusually blunt remarks on rate policy from Prime Minister Gordon Brown, whose popularity has slumped.

Britain's largest mortgage lender, the Halifax, said on Tuesday house prices fell 2.5 percent in March, more than six times as much as analysts had forecast and the largest monthly decline since 1992, when the UK economy was in recession.

The drop reinforced expectations the Bank of England will cut interest rates by 25 basis points to 5.0 percent on Thursday.

In unusually forthright comments, Brown told the BBC: "Because we've got low inflation we can cut interest rates."

Brown, who made the central bank independent in 1997, added: "That's why people are forecasting that British growth will be higher than growth in other countries who are equally affected by what is happening."

At 2.5 percent, inflation is in fact above the 2.0 percent target level that Brown set for the Bank of England.

He built his reputation as a safe pair of hands on the economy as a decade of steady growth followed BoE independence.

But a poll published on Tuesday showed his popularity has fallen to its lowest level since he became Prime Minister last year.

CLOSE TO THE LINE

Up to now Brown has avoided explicitly suggesting what the central bank should do and Tuesday's remarks are unlikely to go down well with the staunchly independent bank.

"It's getting pretty close to the line," said Vicky Redwood, an economist at Capital Economics, although she stressed Brown may have been referring to the two previous recent cuts.

George Buckley, chief UK economist at Deutsche Bank, said the members of the interest-rate setting Monetary Policy Committee would not be swayed by any comments from Brown.

"The Bank will do what it wants to do. Gordon Brown saying we can cut rates will not mean the MPC will do anything differently. These guys are accountable to parliament."

The Bank of England declined to comment.

Sterling fell and interest rate futures rose as the Halifax figures bolstered expectations of a rate cut.

"The increasing danger of a sharp housing market correction heightens pressure on the Bank of England to cut," said Howard Archer, an economist at Global Insight.

ELECTIONS

With regional and London mayoral elections on May 1 and the ruling Labour Party falling behind a resurgent opposition Conservatives in opinion polls, Brown wants to reassure voters he is still the best person to lead the country.

But a Populus poll for The Times newspaper published on Tuesday showed his popularity ratings at 4.5 on a scale of 0-10 - their lowest since he came to power in mid-2007 and lower than all but one month of his predecessor Tony Blair's entire leadership.

"The striking feature of the poll is the public's pessimism about the outlook for the economy and the current state of Britain," political commentator Peter Riddell wrote in The Times. "It is very hard to see this getting any better for Brown over the next year or so. (His) only hope is that the economic downturn will not be too severe or too long."