Mortgage slowdown eases rate rise fears

The prospect of further aggressive increases in interest rates was fading last night amid evidence that dearer borrowing has depressed mortgage demand and consumer spending to their lowest level in more than a year.

Fuelling industry and financial market speculation that the long-predicted slowdown in the property market was finally occurring, the Bank of England said seasonally adjusted approvals for home loans in July fell from 112,000 to 97,000, the weakest figure since March 2003.

City analysts were last night confident that interest rates were at or close to their peak and were ruling out any prospect of a quarter-point rise to 5% when the Bank's monetary policy committee meets next week.

Evidence of a turnaround in the housing market was accompanied by the monthly snapshot by the CBI, the employers' body, of spending in Britain's retail sector, which showed that a combination of rising interest rates and bad weather created tough business conditions for stores in August.

"The housing market is clearly rolling over," said Rupert Thompson, an economist with consultancy GFC Economics. "The key question is whether consumer spending is rolling over on the back of [weakening of the housing market]."

While just over a third (34%) of retailers questioned by the CBI said activity was stronger than in the same month a year ago, almost the same number (32%) said sales were down. In July, the gap between stores reporting a year-on-year improvement in sales over those recording a deterioration stood at 24 percentage points, which itself was down on June.

CBI director-general Digby Jones urged the Bank of England to take a cautious view of further rate rises following the five upward moves since November last year that have taken base rates from 3.5% to 4.75%.

"This is the second successive survey to report an unexpected slowdown in sales. It's true that the weather can influence shopping patterns, but it seems more likely that consecutive interest rate rises are having an impact on spending," said Mr Jones. "If the Bank's strategy of gently slowing consumer spending is working, further rate rises could be put on hold."

Sales of furniture and carpets were strong in August while clothing sales, which are often influenced by the weather, were flat. There was also a slowdown in sales of durable household goods, such as televisions and refrigerators.

Approvals for housing loans in July, according to the Bank's data, were well below the three-month average to June of 119,000, and were seen by analysts as the clearest sign yet that the appetite for mortgages has started to wane.

"There's growing evidence that there's going to be a fairly sharp slowdown in the rate of house price inflation in the second half of the year," said Alan Castle of Lehman Brothers.

The Bank also said mortgage lending growth eased in July to £8.65bn, against £9.34bn the previous month - its smallest monthly gain since August 2003 - although it still remained at a historically high level. Policymakers have said, however, that strong figures are to be expected given the high level of property prices.