Consumer confidence dives as interest rate rises bite

Signs emerged yesterday that the British consumer - the mainstay of the economy for years - may be buckling under the weight of higher borrowing costs.

Consumer spending, mortgage borrowing and consumer confidence have all fallen sharply.

The data came as Kate Barker, a member of the Bank of England's monetary policy committee, strongly hinted that interest rates, which the MPC has raised five times since November to 4.75%, may have reached their peak.

"I think it is certainly true that the message we are giving is not the same as it was when we were at a period when we were clearly indicating that tightening was continuing," Ms Barker told Reuters in an interview. "Clearly we are ... closer to a point when that's not what you are signalling."

Her comments caused the pound to fall back against the dollar as financial markets further scaled back expectations of rate rises. The gradual change of view in recent weeks has already pushed two-year fixed-rate mortgages back below the 5% level.

Ms Barker said she was worried by a series of statistics on the housing market, all of which have indicated that the long-running boom is over.

The latest sign came from the Bank's own numbers, which show mortgage lending in August rose by £8.4bn - the weakest pace in a year. Meanwhile, the number of mortgage approvals - a crucial indicator of future housing market activity - fell to its lowest level in nearly four years at 96,000.

Ms Barker said recent housing market data had been "undeniably weaker". But she still thought a collapse in house prices unlikely, although she did not want to rule it out.

Separately, the CBI released its monthly snapshot of the retail sector showing sales at their weakest for 18 months in September.

The employers' organisation warned the MPC to leave rates at their current level rather than put them up again.

Ian McCafferty, the CBI's chief economic adviser, said: "The Bank of England has been successful in slowing the growth of consumer spending. It must now be careful not to overdo things. Interest rate increases should be put firmly on hold for the time being."

A key survey of consumer confidence from GfK showed its confidence barometer sliding to minus 7 last month, the weakest reading since March last year.

Howard Archer, an economist at Global Insight, said: "The GfK and CBI surveys strongly point to higher interest rates increasingly weighing down on the consumer. In addition, growing concern over the housing market and strong oil prices are also dampening factors.

"It seems increasingly likely that the Bank of England will leave interest rates unchanged for the rest of this year."

Separately, the Office for National Statistics reported it had not revised its original estimate that the economy expanded by a healthy 0.9% in the second quarter of the year over the first.

It also said the country suffered a £6.4bn current account deficit in the March to June period, up from £5.5bn in the first quarter, because of a smaller surplus on investment income.

The deficit is equivalent to 2.2% of gross domestic product, less than half the United States' deficit of 5.7% of GDP. Britain's current account has been in the red since the third quarter of 1998 as the strong pound has curbed exports and boosted imports.