Interest rate cut sparks mortgage approval rise

Mortgage approvals rose substantially in August after the Bank of England cut the interest rate for the first time in two years, official figures showed today.

The Bank said home loans, a barometer of the housing market, rose to 107,000 last month, up sharply from 99,000 in July and the highest figure since last June.

Growth in mortgage lending rose to 7.6bn from £6.7bn in July - the biggest rise in three months and higher than the forecast figure of £7.2bn.

Earlier, the Nationwide building society said annual house price inflation in September had slowed to its weakest pace for more than nine years.

However, the lender said August's rate cut had renewed buyer interest after the Bank's monetary policy committee lowered borrowing costs by a quarter-point to 4.5% in a 5-4 vote.

Despite the bounce in mortgage lending for August, analysts remained sceptical about the possibility of a sustained upturn in house prices.

"With unemployment rising and first time buyers still facing the affordability problems of raising a deposit - together with anecdotal evidence that it remains a buyers' market - we doubt that this improvement in activity will prevent any long term adjustment in house prices," Jonathan Loynes, of Capital Economics, told Reuters.

Although the mortgage figures reinforced perceptions of a recovery in the housing market, credit borrowing remained weak.

Consumer credit picked up in August, but increased only slightly and by less than had been expected. The Bank said unsecured lending rose by £1.3bn.

"Consumer credit growth was subdued in August, suggesting that consumers remain cautious in their borrowing and spending," Howard Archer, of the consultancy Global Insight, said.

"This reinforces our belief that consumer spending will continue to be soft for some time to come, and that another interest rate cut is highly possible before the end of the year."

A Bank official admitted that the UK was at risk of missing Bank growth forecasts unless consumer spending recovered.

Richard Lambert told the Independent that a 2.8% growth forecast remained the "best bet", but added: "I have felt that the risks were on the downside. For that forecast to be achieved, consumption is going to have to pick up quite quickly, quite soon."

However, Mr Lambert said retail sales were unlikely to shoot up after they fell at their sharpest annual pace in at least 22 years during September, adding: "Spending on the high street is not getting any worse - but it is not getting any better."