Consumer and housing booms roar on

Economy: Another bumper month for mortgage lending accompanies substantial jump in household debt

The UK housing market recorded another bumper month in October, with mortgage lending rising by £5.6bn compared with September,the British Bankers' Association said yesterday.

The hefty net increase in home loans was the biggest monthly increase since records began. It was accompanied by another substantial jump in the level of debt consumers have taken on. Consumer lending rose £1.1bn in October compared with September, with only debts ratcheted up on credit cards slightly down on previous months, the BBA said.

Simon Pitkeathley, the executive director of the BBA, said: "With no tangible signs of financial strain, borrowing continues to appear affordable, but with the Christmas shopping season approaching, it is important that consumers remain aware of their commitments and manage them appropriately."

The continued boom in housing and consumer lending reinforced speculation that the Bank of England will not cut interest rates next month.

Minutes from the Monetary Policy Committee's November meeting showed the Bank of England's rate-setting group strengthened its resolve to keep rates on hold at 4 per cent.

The Committee voted seven to two to keep borrowing costs steady as Kate Barker switched sides to join the majority after voting for a quarter-point rate cut last month.

The minutes said a rate cut could fuel house price rises and borrowing, thereby further "increasing the risk of a sharper fall in consumption at some point in the future".

There have been slight signs of a slowing in the housing market from other quarters. The property website Rightmove said house prices slipped by 0.2 per cent in October compared with September, the first drop since the start of the year.

The MPC has left the door open to lower rates in the event that the international economy took a turn for the worse. In such a situation, "there would be time to reduce rates to keep inflation on target around a two-year horizon," the minutes said.

But the MPC's scepticism of signs showing a slowing in the UK consumer economy was underlined by Mervyn King, the deputy governor of the Bank of England, who warned on Tuesday about the potential dangers of the frenetic consumer side of the economy.

Henk Potts, an equity strategist at Barclays Private Clients, said: "The reality is the MPC is really scared about house price inflation and we anticipate it is very unlikely they will now cut rates."

Separately, figures released by the Office for National Statistics showed that while secured and unsecured borrowing by individuals continues to thrive, the public finances are in a worse state than many in the market had predicted.

Economists said the figures increased the likelihood that the Chancellor, Gordon Brown, will increase his public borrowing forecasts in next week's pre-Budget report and revise down his forecasts for growth.

The ONS reported a public sector net cash surplus of £2.53bn last month, less than half the surplus posted in the same month last year and well short of the £4.3bn surplus predicted by City economists.

Alan Castle, an economist at Lehman Brothers, said: "The numbers are slightly worse than expected. It underscores the trend which we've seen throughout this year, which is the deterioration in the public finances relative to last year and relative to the Chancellor's Budget forecasts."

The Confederation of British Industry said it was pushing back its forecast for economic recovery and cutting its prediction for Britain's GDP growth from 2.7 per cent to 2.4 per cent for next year.

The organisation reported more distress from manufacturers, who were this month at their most gloomy about the outlook for the sector since March.