Bank poised to hike interest rates

TENTATIVE signs higher interest rates are starting to bite will not prevent the Bank of England from lifting the cost of borrowing further in coming months.

City economists warn the Bank's monetary policy committee will need to see concrete evidence that the housing, borrowing and spending booms are cooling before it takes its finger off the rates trigger.

They expect rates to rise from 4.5% to at least 5.25% by the year-end.

Figures last week from the British Bankers' Association showed mortgage lending posted its smallest rise for six months in May.

The data sparked speculation that last month's rate rise may have made consumers think twice about piling on more debt. The MPC raised rates again at the beginning of June - the first back-to-back increase for more than four years.

The BBA data came just days after the Royal Institute of Chartered Surveyors said heated speculation over higher rates had hit buyer activity in May. Estate agents reported a fall in the number of people looking for properties for the first time since last December.

Meanwhile, the latest CIPS/Reuters purchasing managers' report showed Britain's massive services sector continued to forge ahead in May, but at its slowest pace for nine months. And a separate report from Royal Bank of Scotland said London's economy was slowing as the capital bears the brunt of higher borrowing costs.

But economists think it is too early to say whether the four rate rises since last November are putting the brakes on the economy.

Jonathan Loynes at Capital Economics said: 'One would struggle to reach that conclusion with any firmness. Household data have remained pretty solid and consumer confidence has remained stable. I don't think the MPC will be reassured by these tentative indications of a slowdown.'

Ross Walker at Royal Bank of Scotland added: 'The consumer is still largely oblivious to higher rates. Mervyn King's speech last week was aimed at raising awareness, taking its concerns about the housing market from the inside pages of the Financial Times to the front pages of The Sun and the Daily Mail.'

The Bank's Governor had warned that chances of a house-price crash had risen. Until there is solid proof that rampant property prices and spending are slowing, the MPC is unlikely to relax.