Home loans surge fuels rate rise fears

Low interest rates fuelled a record rise in mortgage lending last month as the start of the spring house-buying season prompted a fresh increase in the cost of property, according to figures published yesterday.

Fears that the Bank of England would soon be forced to push up the cost of borrowing were intensified by data from the British Bankers' Association showing that borrowing for home loans continued to surge last month, reaching new heights for the third time this year.

Although the latest inflation figures - also published yesterday - showed no immediate threat to the government's 2.5% target, some analysts believe that a tightening of monetary policy over the coming months looks increasingly inevitable.

Inflation excluding mortgage interest payments - the government's preferred measure of the cost of living - rose by 2.3% in the year to April, unchanged on the previous month, the office for national statistics said. Cheaper food, household goods and CDs helped offset increases in the cost of petrol, higher council tax bills and foreign holidays.

The BBA said the "consumer feel-good factor" was continuing unabated and speculation that the Bank's monetary policy committee might increase interest rates from their 38-year-low of 4% was encouraging individuals to bring forward their applications for mortgages.

Underlying the BBA's remarks, the Council of Mortgage Lenders said the amount lent by banks and building societies in April rose to a new high of £16.9bn. This compared with £16.1bn in March and was substantially higher than the £11.6bn recorded in April last year.

There were also record levels of remortgaging last month as growing numbers of homeowners took advantage of the lowest mortgage rates for decades to switch to more competitive deals. Lenders wrote £6.9bn worth of remortgage business in April.

Michael Coogan, the CML's director general, said: "Mortgage and housing markets have been more buoyant than expected this spring but we expect them to slow later in the year, particularly if there is a modest rise in interest rates in the coming months."

The view from the Royal Institution of Chartered Surveyors was that there would appear to be no end in sight to rising house prices. It said prices continued to scale the heights during the three months to April 30, with the majority of members reporting price increases of between 2% and 5% during the period.

It said 63% more surveyors reported seeing prices rise during the period than reported falls - the highest figure since November 1999.

Despite the strength of house prices, the ONS reported little spill over into the rest of the economy. The all-items measure of inflation - which includes mortgage interest payments - rose from 1.3% to 1.5% last month. Using the harmonised measure of living costs applied to all EU states, Britain's inflation rate of 1.3% is the lowest in Europe.

The TUC general secretary, John Monks, said: "These figures confirm that there is little underlying inflationary pressure in the economy. With the manufacturing sector still losing 10,000 to 15,000 jobs a month, there is no economic justification for an interest rate rise in June."

Further evidence of the two-speed economy came from the Engineering Employers' Federation, which said pay increases were running at 2%, the lowest since the series began in 1984. But demand is being supported by higher public spending.

Treasury figures showed that government spending was 10% higher in April than a year earlier, while the surplus dropped from £1.5bn in April 2001 to £0.3bn last month.