Rates left on hold in UK as economy speeds up

The Bank of England resisted calls to cut interest rates today as a fresh batch of figures showed an economy firing on all cylinders.

House prices, mortgage lending and activity in the UK's dominant services sector all grew at their fastest pace for more than two years.

The figures, which followed data this week showing an upturn in retail sales and manufacturing output, boosted speculation the next move in rates would be up.

The Bank's Monetary Policy Committee left the base rate at 4.5 per cent for the ninth month in a row.

Analysts now await its quarterly inflation forecasts next week.

Alan Clarke, UK economist at BNP Paribas, said: "The case for a hike is increasingly strong." Last week the National Institute for Economic and Social Research urged the Bank to raise rates to head off a rise in both inflation and households' inflationary expectations.

But David Frost, the director general of the British Chambers of Commerce, "strongly rejected" calls for a pre-emptive increase in rates.

"Such a move would be extremely damaging. Indeed, given the risks facing the economy, we believe the MPC may need to consider a cut in interest rates later in the year if economic circumstances worsen," he said.

Halifax, the UK's largest mortgage lender, was first out of the blocks with upbeat data.

It said the price of the average home jumped 2.0 per cent between March and April.

This was the strongest rise since April 2004 and took the annual rate to a13-month high of 8.0 per cent.

John Butler, UK economist at HSBC, said the 4.5 per cent increase over the last three months translated into annual inflation of 18 per cent.

"At face value that is not stability, that is the type of pace associated with a boom," he said.

But Martin Ellis, its chief economist, played down the prospect of a boom, saying higher utility and council tax bills would dampen enthusiasm for house purchases.

"While the market may remain relatively buoyant over the coming few months, we expect the recent softening in the labour market in relation to earnings to curb demand," he said.

There was fresh evidence of a strong surge in activity from Bank of England figures showing mortgage lending hit a 28-month high in March.

Homebuyers borrowed £9.3bn, the biggest rise since November 2003 when the Bank last started raising rates.

But unsecured borrowing - bank loans, credit card spending and HP agreements - hit its lowest level for more than a decade.

Households borrowed just £300m in March, down from £1.2bn in February and the lowest level of borrowing since February 1994.

The services sector posted its strongest growth since December 2003, according to the Chartered Institute of Purchasing and Supply.

Its overall index jumped to 59.7 in April from 57.4 in March on a scale where a number over 50 indicates expansion.

- INDEPENDENT