Consumer confidence falls

Rising interest rates have sent consumer confidence tumbling to a 10-month low but have failed so far to cool demand for home loans, which hit a new record in October.

The data suggest the Bank of England's attack on the consumer is beginning to work, but that it may decide further increases in the cost of borrowing are needed to rein in demand and safeguard the government's inflation target.

The Bank of England's monetary policy committee began raising interest rates in September, followed by a second quarter-point increase earlier this month.

Since then consumer confidence has fallen steadily, and the latest results of the monthly poll carried out by GfK Great Britain on behalf of the European commission, published today, shows it dropping four points and sliding into negative territory for the first time since February. Pessimists now outnumber optimists by 2%, the poll shows.

The decline in sentiment is concentrated among higher earners (£25,000-plus), who are most likely to be home owners and feel the squeeze of dearer mortgages. With domestic demand rising rapidly and threatening to outstrip supply, putting upward pressure on prices, the MPC is likely to regard the results of the GfK poll as a success if it heralds a slowdown in consumer spending.

However, while rising interest rates are generating concern about the outlook for the economy and household finances, they do not yet appear to be influencing consumers' behaviour.

Official figures published by the Bank of England yesterday showed that net mortgage lending rose by a record £3.64bn in October, although the number of new loans approved was slightly lower than in September.

Analysts said bigger but fewer mortgages pointed to a continued rise in house price inflation - a fact underlined by the Nationwide building society's monthly house price survey, published today.

It shows average prices rose by 1.9% in November and by 13.3% over the year, the highest annual increase since the third quarter of 1989.

Although price growth remains strongest in London, it is rippling out towards the rest of the country.