Mortgage growth fuels talk of rate rise

Mortgage lending grew at a blistering pace in February, the Bank of England reported today, fuelling speculation of a rise in interest rates as soon as next week.

Lending secured on dwellings rose by ?8.9bn last month, more than the ?8.4bn gain in January, and up a record 14.5% on the year. Unsecured lending rose by ?1.7bn. It was down from January's revised ?2bn gain but stronger than the ?1.6bn increase expected by analysts.

Total lending to individuals rose by ?10.7bn, or up 14.1% on the year, the same as November's record rate of increase. Today's figures can be expected to be scrutinised closely by the Bank of England before it announces its decision on interest rates next week.

Last Friday, the Bank of England governor, Mervyn King, told MPs on the Treasury select committee that he was prepared to "act early" to keep inflation in check. Stephen Nickell, a Bank policy maker, also hinted at higher rates last week.

He told reporters in Paris on the sidelines of a meeting of the Organisation for Economic Cooperation and Development that interest rates will rise as consumers borrow more for house purchases. Moreover, Paul Tucker, the Bank's executive director in charge of financial markets, said the current rate of 4% still left "policy stimulating the economy".

The Bank has raised borrowing costs twice since last November, with the last move coming in February, when it nudged up rates by a quarter-point to 4%. But in minutes from the March meeting, the Bank's monetary policy committee admitted that the two interest rate rises appeared to have had little dampening effect on house prices or consumer borrowing.

Today's figures also indicated that the housing market is likely to remain strong for some time yet, as mortgage approvals - loans agreed but not yet made - totalled 118,000 in February. While this was less than the 120,000 seen in January, it still remained well above the sub-100,000 levels seen in the first half of last year.

The pressure on house prices was underlined when Halifax, Britain's biggest mortgage lender, reported that the value of property in the UK has nearly doubled during the past five years to reach ?3 trillion. Halifax said the collective value of private housing rose by 15% during 2003 to ?2.9 trillion, nearly triple the ?1.1 trillion it was worth 10 years ago.

Until last week, most City economists were predicting a rate rise in May, but a growing number are leaning towards an April move.

Seven of 13 economists surveyed by the Bloomberg news agency last week after Mr King's remarks expected the bank would raise rates in April, with the rest forecasting an increase in May.