Soft touch

A month ago, the nine members of the Bank of England's monetary policy committee voted unanimously to raise interest rates, to slow the economy down. Tomorrow at noon, when the committee concludes its monthly meeting, the likelihood is that the same nine members will again vote unanimously, but this time to keep interest rates on hold. What changed in a month? On the face of it, quite a few things. The key is that house price rises have softened, with a clutch of surveys pointing to something of a slowdown, along with a fall in mortgage approvals. That suggests the bank's decision to raise rates five times since November may have defused a damaging build-up in asset prices.

Other aspects of economic activity have also been muted. The past two months have seen a mild decline in employment, with pay increases remaining subdued, while surveys of purchasing managers have shown a fall back in orders. New figures yesterday revealed an abrupt decline in manufacturing output during July - attributed to lower beer and pharmaceutical sales after Euro 2004: truly a national hangover.

The net effect suggests the Bank of England may need only one further interest rate raise in the coming months to cool down consumer spending and borrowing to a sustainable rate. That would reinforce the bank's confidence, expressed in last month's quarterly inflation report, that the UK economy was responding helpfully to its medicine of raising base rates from 3.5% a year ago to 4.75% today. If so, the monetary policy committee has managed the fabled "soft landing": a painless slowdown, achieved without provoking a housing market crash or widespread unemployment.

In that case, the bank should be applauded for its stewardship. But there is a problem with landings: they can all be soft, right up until hitting the ground. The bank may have declared victory over the exuberance of the great British consumer, but it has already done so three times in the last four years. Worryingly, a survey published yesterday was disturbing for those wishing for a soft landing: 60% of consumers say higher interest rates would not affect their spending plans, while the same percentage say they have not cut back spending since the recent rate rises. On Monday it was reported that two-thirds of consumers expect house prices to keep rising this year. This, and the still rapid rate of overall economic growth, suggests that while the bank may be right to sit on its hands for a month or two, it should beware of assuming its battle has been won.