Soaring house prices to push up loan rates

The Bank of England was last night poised to raise interest rates for the second time in three months as it sought to counter a £100 a day rise in house prices.

With the latest figures from the Halifax, the UK's leading mortgage lender, showing property prices soaring last month, the City was braced for the first of a series of increases in the cost of borrowing to be announced later today.

Analysts believe that a quarter-point rise to 4% will be followed by several more moves by the Bank's nine-strong monetary policy committee, which will take base rates to 5% by the end of the year.

Today's widely anticipated action by the MPC comes amid signs that higher house prices are a reflection of the underlying strength of the economy. Data released yesterday by the Chartered Institute of Purchasing and Supply (CIPS) showed that the service sector - which makes up around 70% of the economy - is growing at the fastest pace since Labour came to power in the spring of 1997.

Interest rates hit a 48-year low of 3.5% last summer on fears that the war in Iraq would push the global economy into recession.

The Bank nudged rates up to 3.75% in November once it emerged that the pessimism had been exaggerated, and data over the past three months has pointed to robust growth, a Christmas spending spree by consumers and a recovery in manufacturing.

The Treasury signalled this week that it would fully back any tightening of policy by the Bank, even though that will increase the costs of home loans for Britain's 11 million mortgage payers, adding £12 per month to a typical £80,000 repayment mortgage.

The Halifax said the 2.2% jump in prices last month - the largest monthly rise for well over a year - added £3,202 to the average price tag. With the average home now costing £145,610, the hefty increase in the cost of property confounded analysts who said the boom was petering out.

January's strong perfor mance lifted the annual rate of house price growth to 16%. Even so, the Halifax stuck by its prediction that prices will end this year 8% higher.

Interest rates were set to rise further this year, which would act as a brake on the market, said Shane O'Riordain, the bank's group economics general manager.

"The extent of the rise is, however, expected to be modest and will therefore cause few problems for the majority of homeowners," he added. "The economy is expected to grow more rapidly in 2004 than during the past three years, which should stimulate further increases in employment, therefore further underpinning the most fundamental pillar supporting the housing market."

Evidence of the robust economy came from the CIPS survey of services, which rose from 58.5 in December to 59.8 in January. A reading above 50 indicates that activity is rising, but January's finding was the strongest since June 1997.

Stephen Radley, chief economist at the EEF, the manufacturers' organisation, warned that higher rates might push up the value of the pound and make life tougher for exporters.

"Whilst the picture for manufacturing is undoubtedly improving, the strength of the upturn remains uncertain, especially as the full effects of the dollar's weakness have yet to feed through and there are limited signs of recovery in the eurozone. Whilst companies might understand the rationale for any increase they are fearful that it might only serve to pour fuel on the fire of a stronger pound against the dollar."