Dearer home loans on the way

Mortgage rates are expected to rise for the first time in almost four years as the Bank of England's monetary policy committee today seeks to slow Britain's soaring housing market and end the consumer borrowing boom.

But the UK's biggest mortgage lender, Halifax, yesterday signalled that the anticipated quarter-point increase would do little to take the steam out of the newly resurgent property market.

The City is expecting the MPC to raise borrowing costs by 0.25 percentage points to 3.75% today, the first increase in rates since February 2000, with mortgage lenders likely to quickly follow suit.

The Bank is concerned that consumers have taken advantage of the lowest interest rates for almost 50 years and a buoyant housing market to run up record levels of debt. Analysts said they did not expect yesterday's weaker than expected data from Britain's hard-pressed manufacturing sector to dent the case for higher borrowing costs, especially with the Office for National Statistics figures also showing the service sector growing at its strongest rate since the end of 1999.

"Taken together, these data releases still leave us on course for a rate hike tomorrow," Adam Cole, an economist at investment bank Credit Agricole Indosuez, said yesterday.

"Though the manufacturing data are disappointing, strength in the service sector indicators along with other domestic demand data, are more than sufficient to offset this."

John O'Sullivan, UK economist at Dresdner Kleinwort Wasserstein, said it would be house prices rather than the economy or inflation which would sway the MPC. "The only unnerving data has been from the housing market."

Mr O'Sullivan said that raising rates by 25 basis points, breaking the downward trend in rates, would sent a "quite powerful signal", while raising rates by more than that would risk hitting the recovery.

Yesterday's figures underlined Britain's two-speed economy. While the service sector demonstrated strong growth, manufacturing output fell 0.2 percentage points in September. It came alongside a survey from the CBI which showed orders to smaller manufacturing firms falling at the fastest rate for two years.

But nothing seems to be able to hold the housing market back, with homebuyers shrugging off interest rate and tax rise fears, and warnings about spiralling consumer debt.

The Halifax said house prices rose 1.2% in October and were 16.7% higher than a year ago. The average price now stood at £137,780.

Martin Ellis, Halifax's chief economist, said: "The housing market remains strong and is still underpinned by strong fundamentals." He expects an increase in rates to have a "minimal" impact on the housing market. "If rates rise by 0.25%, this will add approximately £4 per week to a typical £80,000 mortgage - a figure which the vast majority of homeowners can easily absorb."

While personal debt levels are high, borrowing remains very affordable, claimed the lender. Less than 14% of a typical borrower's gross earnings are going on mortgage interest payments, well below the long-term average of 21%.

The Halifax said more than half of all new borrowers were opting for fixed-rate mortgages, where they are protected from the ups and downs of interest rates. Another factor driving up house prices was the shortage of new homes.

But CBI director general Digby Jones urged the MPC to act cautiously. "If the Bank chooses to raise interest rates today, the move must represent the reversal of July's precautionary cut and not break the dam on interest rates by signifying a series of quick rate rises. We must avoid knocking any potential manufacturing recovery off course."

David Kern, economic adviser to the British Chambers of Commerce, went one step further. "The deep-seated forces that have caused prolonged manufacturing weakness in the past few years still pose a threat. The clamour for early interest rate increases is clearly unjustified."