STEADY ON, EDDIE

How much harm will the next interest rate rise do construction? The obvious response seems 'plenty'. But is it right?

The BEC's director-general, for one, talks of 'dire consequences' if, as seems almost inevitable, 6.75% becomes 7%-plus in the next fortnight. There are many main contractor chiefs who agree, and talk gloomily of fresh job cuts. But there are also some major contractors who shrug resignedly and play down the catastrophic scenario, claiming it may even have little or no effect. Since this is naturally what we all hope, the views of this latter, admittedly minority group, are worth examining further.

These doughty optimists take their stand on three tenets. Given today's generous discounting deals, they argue housing affordability should not suffer: indeed, any rate rise will most likely create a new crop of attractive bargains. Ergo, the housing market need not decline further.

Next, any prudent contractor will have already pencilled in near 8% interest rates in its forward budget projections and will already be in shape to perform in such a climate. When the economy started accelerating last year, not to have done so would have been irresponsible.

Finally, though painful for construction now, a rate rise may be what macro-economics demands - and stiffling re-emerging inflation will ensure that contractors can, in the not distant future, operate in a more stable environment. In addition, if presented smoothly by the Chancellor of the Exchequer, the rise may be viewed as ensuring no further increases this year and helping pave the way for imminent tax cuts. Thus, paradoxically, the feel-good factor may be enhanced by this rate rise maneouvering.

How convincing is this argument? Not very, if one is a small operator hanging on desperately for survival. But more plausible, possibly, if one is a large, well diversified contractor which has already pruned ruthlessly and has the strength to take another slug on the chin.

Yet not even the strongest contractor will welcome Kenneth Clarke's announcement for none can predict with confidence how our economy and its consumers will respond. What is totally clear is that a future rate increase is in no sense the encouraging lifeline construction so badly requires. For this reason alone, the BEC is right to condemn the rise, regardless of how accurate its predictions ultimately prove to be.