House buyers and shoppers dampen hopes of rate cut

The prospects of a pre-Christmas cut in interest rates receded sharply yesterday amid evidence of a pick-up in demand for mortgages and the willingness of bargain-hungry consumers to be lured back into the shops.

Although data out today is likely to show the economy as a whole grew only modestly in the third quarter of the year, even the most downbeat of City analysts was saying last night that the Bank of England was likely to act cautiously at its rate-setting meeting early next month.

The British Bankers Association said mortgage lending was at its strongest for nine months, while the volume of goods sold across the counter or online rose by 0.7% in September - much higher than analysts had been predicting after gloomy surveys from the CBI and the British Retailers Consortium.

Last night, the City remained divided about the short-term outlook, with some confident that the economy is now over the worst and others believing the signs of recovery will be quickly snuffed out unless there is a further easing of policy.

The final piece of official data released yesterday - for the public finances - did little to assuage fears that borrowing this year will be higher than Gordon Brown forecast in the Budget earlier this year. Speculation was again rife yesterday that the chancellor will need to raise taxes in order to balance the books.

Retail sales

Reports of a September meltdown on the high street were confounded by the sharpest growth in sales volumes this year. But even the unexpectedly hefty increase did not save the sector from showing its weakest annual growth for 10 years.

In the three months ending to September, the seasonally-adjusted volume of retail sales was 1% higher than the same period a year before - well down on the 6% growth rate recorded for the whole of 2004. Sales of household goods including furniture, carpets and DIY were particularly badly hit, falling by 2.4% year-on-year - the worst result since October 1991.

Analysts pointed out that retailers were only able to entice customers by cutting prices, and that this explained the downbeat mood picked up by trade surveys. David Page at Investec said the value of retail sales was actually lower than it was a year ago. It is only the second time this has happened since the second world war.

Mortgage lending

Two sets of figures for home loans yesterday pointed to a recovery in the housing market after its 15-month period of weakness. The British Bankers Association said net lending secured on dwellings rose by £5bn in September, the largest increase since December last year, while the Council for Mortgage Lenders said gross lending had increased by 4.3% last month to more than £29bn, one of the highest figures on record.

Part of the jump in lending was accounted for by re-mortgaging, but there have also been signs that underlying demand has started to recover. Michael Coogan, the CML's director-general, said: "Our latest data provides evidence that the housing market is in relatively good health, and households are not lacking confidence to take on mortgages."

Public finances

Net borrowing by the government in September stood at £5.2bn, up from £4.7bn in the same month a year ago, the Office for National Statistics said. In the first six months of the 2005-06 financial year, borrowing was £22.9bn, barely down on last year's £23.6bn.

For the year as a whole, Gordon Brown has predicted borrowing will come down from £38bn to £32bn, but the City believes this is highly improbable. Treasury sources said that tax receipts would be boosted by the rise in the oil price in the second half of the year, and that borrowing last month was higher because of increased investment in infrastructure.

The current budget for day-to-day government spending was £14.6bn in the red in the first six months of the year, compared to £17.6bn last year. Mr Brown is expecting a full-year improvement from a deficit of £19bn to a £6bn shortfall.