Bank under pressure to increase interest rates

The Bank of England was under increasing pressure yesterday to raise interest rates next week after the latest mortgage figures showed demand for new home loans at its strongest for almost two years. Data from the British Bankers Association showed there were just over 86,000 approvals for house purchases in June - a rise of almost 22% on the same month in 2005.

The news came as the head of a leading economic thinktank urged the Bank's monetary policy committee to act immediately to tighten policy rather than wait until later in the year.

"There is little to be gained by delaying until later in the year," said Martin Weale, director of the National Institute of Economic and Social Research. "Given that inflation is staying above its target, and given that rates are expected to rise, I can't see a strong case for waiting."

The MPC has held rates at 4.5% since last August, but NIESR believes rates will rise by 0.25 points by the end of this year and by a similar amount next year. Even then, it believes inflation will remain slightly above the government's 2% target.

In its quarterly forecasts for the economy, the thinktank said it expected growth in each of the next two years to be slightly lower than it previously predicted - 2.5% not 2.75% - as a result of dearer borrowing, the rise in oil prices and the impact of a stronger pound on exports.

Although it sees no good reason for the Bank to delay, it said there would be little damage if the MPC did not raise rates until later this year.

It said the Bank would be under pressure to move if the public expected inflation to rise.

"If that happens, the Bank has to move very fast," said Ray Barrell, a senior research fellow at NIESR.

The City believes the chances of an August rate rise have increased over the past few weeks. Growth in the second quarter was robust at 0.8%, the World Cup helped boost consumer spending and the CBI survey of manufacturing earlier this week showed exports were being helped by strong global demand. In addition, inflation rose to 2.5%.

Yesterday's BBA figures for mortgages showed seasonally adjusted mortgage lending amounted to £5.6bn in June - only slightly down on the 25-month high of £5.8bn in May, and above the average of £5.3bn a month in the six months to May.

Milan Khatri, chief economist at the Royal Institution of Chartered Surveyors, which represents estate agents, said that despite the distraction of the World Cup, housing market activity remained "strong".

Consumers, however, remained wary of taking on more personal debt, with credit card borrowing falling for the third time in four months.

Howard Archer, economist with Global Insight, said he still believed interest rates would be held at 4.5% next week, but that "the more hawkish members of the MPC may see the current strength of housing market activity as boosting the case for a near-term interest rate hike".

The BBA figures include mortgages from the main UK banks and account for around two-thirds of all home loans. Fuller data will be released by the Bank next week, and economists believe this will show demand remains firm.

"Overall, we see little reason to believe that recent stability in mortgage approvals will cease in the next two to three months," said Kelvin Davidson, property economist at Capital Economics.