City expects rate increase

City expects rate increase

The City was last night betting heavily on a new year increase in interest rates after the release of figures showing record mortgage lending to a booming property market and a surge of pre-Christmas retail spending.

Fuelling concerns that strong demand would fuel inflationary pressure in the economy, the British Bankers' Association said higher borrowing costs had so far failed to dampen appetite for home loans while the CBI reported the strongest retail sales for two years.

Minutes of the December meeting of the Bank of England's monetary policy committee (MPC) revealed a unanimous 9-0 vote in favour of leaving the cost of borrowing unchanged at 5%, but sterling was within three cents of the $2-level against the dollar last night as the City's money markets signalled that rates would be raised to 5.25% by March.

The Royal Institution for Chartered Surveyors - the body that represents estate agents - said the housing market would have a buoyant start to 2007. House prices are already rising at an annual rate of almost 10%, with some analysts predicting that property inflation will climb to 15% by the end of next year.

David Stubbs, senior economist at the RICS, said: "These figures, coming only days after another strong survey of the market by the RICS, are yet further proof that the housing market will enter 2007 with significant momentum. Housing demand will continue to outstrip supply leading to continued price gains throughout.....continued below

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the year and tempting the Bank of England to raise interest rates at least once, if not more, in the first six months."

The British Bankers' Association said record demand for mortgages in November had been accompanied by a renewed appetite for consumer debt. Net mortgage lending (new advances less loans repaid) rose by £6.5bn in November, a hefty increase on October's £5.6bn and the average of £5.7bn over the past six months.

David Dooks, director of statistics at BBA, said: "This shows just how strong secured lending is and how, as yet, demand has not been moderated by the climate of higher interest rates." Credit card lending, after falling by an average of £248m a month between May and October, rose by £66m in November as consumers ran up debts to finance spending.

The latest snapshot of retailing from the CBI showed that talk of a poor Christmas for shops and stores might prove too pessimistic. Almost half the retailers questioned said sales were higher in the first two weeks of December than they were a year earlier, while only 22% said they were lower.

Supermarkets and specialist food stores were the best performers, according to the CBI's distributive trades survey, followed by footwear and leather outlets. Many retailers fear, however, that they may pay for a strong December with weaker consumer spending in January. Almost as many stores believe sales volumes will fall year-on-year next month as expect them to rise.

John Longworth, executive director of Asda and chairman of the CBI's distributive trade panel, said: "After a slow start in the run-up to Christmas, sales are really beginning to build. In the first two weeks of December, retailers' sales volumes outshone their expectations, proving that good things can come to those who wait. The last 10 days have been very good."