Mortgage lending rise slowest for three years

UK mortgage lending rose at its weakest pace for more than three years in July, with consumer credit also growing less than expected, official figures showed today.

However, figures on mortgage approvals - loans agreed but not yet made, which are often a pointer towards future activity - indicated that the housing market was stabilising.

The Bank of England said mortgage lending rose by ?6.5bn last month, compared with analysts' forecast for ?7.1bn and a ?7bn rise in June. The rise was the weakest since June 2002.

The figures coincide with a slowdown in the housing market, with house prices stagnating following double-digit property price inflation just a year ago.

Approvals increased slightly, to 97,000 in July from 96,000 in June - the highest since July 2004 and well above a recent trough of 77,000 last November. At the peak of the housing market, in late 2003 and early 2004, approvals were running at around 130,000 a month.

The Bank of England has pursued a policy of gradual interest rate rises to curb consumer spending. However, earlier this month it lowered borrowing costs by a quarter-point to 4.5%.

Industry, however, has yet to take up the slack as consumers take a breather. With consumer activity subdued and manufacturing still in recession, analysts believe the Bank has been overoptimistic on its growth forecasts, with the result that inflation will be lower than it thinks.

"This, in our view, leaves room for further rate cuts. We still look for the rate to be cut to 4% in the first quarter of 2006," James Knightley, of ING Financial Markets, told Reuters.

Bank data also showed a slower rate of growth in borrowing. Net consumer credit rose by ?1.2bn in July, less than the ?1.5bn increase expected by analysts and following a rise of ?1.3bn in June.

Annual growth in consumer credit slowed to 12.1%, the weakest level since June 2001. The data is the latest in a series reflecting sluggish consumer borrowing, although analysts believe there may soon be a rebound. Credit card lending rose by just ?312m, the lowest rise since June 2001.

"Consumer credit has shown a bit more weakness than in recent years, but that may not be sustained," Alan Castle, a UK economist at Lehman Brothers, said.