Rate increases fail to slow pace of house price rise

House prices are rising at their fastest pace for more than 10 years, despite the Bank of England's attempts to take the froth off the market with higher borrowing costs.

The price of the average house rose by 2.4% in January to £85,168, according to figures issued by Halifax, the largest mortgage provider.

Last month's rise took the annual rate to 16% - the strongest rate of growth since August 1989.

"The recent interest rate rises appear to have done little to slow the pace of the housing market so far," Halifax said. However, with further rises expected, house price inflation should ease later in the year.

The strength of the housing market in the depths of winter is worrying economists. January is usually a quiet month for property transactions and this is the first time since the index began 15 years ago that prices have risen in the first month of the year.

"Even in the peak of the 1980s boom, prices fell by 0.2% in January 1988," said Ciarán Barr, senior UK economist at Deutsche Bank. "This puts further pressure on the Bank of England to raise interest rates at next week's meeting."

Growth in the service sector is starting to slow, according to separate figures from the Chartered Institute of Purchasing and Supply.

Its monthly snapshot of the market showed business activity dipping in January and, while the sector is still expanding, growth rates have eased from their peaks of a few months ago.

"Higher interest rates and a stronger pound are already producing a loss of momentum," said Richard Iley, UK economist at ABN-Amro.

With the rest of the economy cooling after the three increases in interest rates since last September, the news that the housing market shows no signs of coming off the boil poses a dilemma for the Bank's monetary policy committee.

But some analysts think the rise in house prices is not spilling over into the rest of the economy, where inflationary pressures are subdued. Shop prices fell in January for the ninth month in a row, according to the British Retail Consortium's monthly index, published today.

"[The housing market] is not having the inflationary impact it would have had in the past," said David Hillier, UK economist at Barclays Capital. "If [it] were rampantly inflationary, you would expect household goods prices to be rising."