Rate rise curbs spending

Retailers were bracing themselves for a lean Christmas yesterday after a report showed the Bank of England's latest interest rate rise helped push down consumer confidence to its lowest since the Iraq war.

Households appear to have heeded warnings from the Bank about running up too much debt and are planning to save more and cut back on big-ticket spending, according to the survey from research company Martin Hamblin GfK.

"This survey provides the first tangible evidence that November's interest rate hike has bruised consumer confidence," said Ross Walker at the Royal Bank of Scotland.

The quarter-point rise in rates to 3.75% this month was an attempt to slow the build-up in consumer debt and curb house prices.

Separate figures published yesterday by the big retail banks showed the housing market in buoyant mood ahead of the November rate decision. Mortgage lending reached a record £17.8bn in October, according to the British Bankers' Association.

The BBA warned that, with loans approved also at an all-time high, the momentum in the market was likely to continue for some months.

"This data shows no signs of the mortgage market slowing down, as gross and net lending figures peaked again," said David Dooks, BBA's director of statistics. "And this strong lending growth is likely to be maintained in coming months as record numbers of approvals granted in October progress to completion."

Despite the reduction in the number of people planning big purchases, the GfK survey showed that consumers remain confident about their own financial situation, suggesting that rising house prices may be easing worries about the economy.

The Bank believes, however, that the current rate of house price increases is unsustainable and, if left unchecked, could result in a painful correction.

The BBA said 270,500 mortgages were approved by the big banks during the month, collectively worth £19.6bn. This is 23% higher in value and 10% more in volume on approvals during October 2002.

Borrowing on credit cards totalled £7.36bn in October, 7% higher than the recent monthly average. Consumers are, however, paying down credit card debt, taking net lending to £374m, the lowest monthly increase since June.

The GfK index peaked in July and has been steadily falling since the summer. This month's three-point slide to minus six was sharper than the market had expected and takes the index to its lowest level since March.

"The increase in interest rates has probably affected how consumers perceive whether it is the right time to make major purchases," said Roger Wright, Martin Hamblin GfK director.

Analysts said the survey pointed to weaker retail sales figures ahead, and would encourage the Bank to be wary about further rate rises.

"The year on year rate of change in spending may edge a little lower over coming months," said Simon Rubinsohn, an economist at Gerrard. "The response of consumers in the survey highlights the dangers posed by the prospect of higher base rates."

With consumers showing signs that they are preparing to tighten their belts, Mr Rubinsohn said that a further increase in borrowing rates at next week's meeting of the monetary policy committee appeared unlikely.