Consumer confidence takes a knock as rate rises bite

Consumer confidence suffered an unexpected fall this month while growth in mortgage lending and house prices both slowed, according to a batch of figures that appeared to confirm that rises in interest rates are starting to bite.

Consumer confidence suffered an unexpected fall this month while growth in mortgage lending and house prices both slowed, according to a batch of figures that appeared to confirm that rises in interest rates are starting to bite.

Households are at the most pessimistic since the end of last year, according to the UK's only survey of confidence.

More significantly, consumers have reined in their plans to embark on further spending sprees and now intend to rebuild their savings. Analysts said this could point to a wider slowdown in the domestic economy that could put the brakes on further rate rises.

The research company Martin Hamblin GfK said its consumer confidence barometer tumbled to minus four during June. That compares with minus two in May, and defied analysts' predictions of an unchanged reading. The fall was almost entirely due to a drop in the measure of people's willingness to make major purchases, which fell sharply to its lowest level since January 1999.

Grant Montague, a director at Martin Hamblin, said: "The drop in the index demonstrates the reaction of consumers to the recent interest rise this month and speculation of further increases."

Meanwhile the number of people who believe that now is a good time to save money rose sharply to the highest level since the survey began. John Butler, HSBC's UK economist, said: "If the weakness in this survey persists, it is perhaps the first evidence that consumers are starting to take note of the rate rises and adjust their behaviour."

The figures come a day after the Bank of International Settlements, the central banks' central banker, warned of a threat to financial stability if falls in house prices led to a sharp drop in consumer spending.

Nationwide building society said house prices rose 0.9 per cent in June, the slowest rise for five months and a sharp drop from May's 1.7 per cent. This took the annual rate of growth down to 19.1 from 19.5 per cent.

Alex Bannister, its chief economist, forecast a "long drawn-out period" of low price rises with some parts of the country seeing zero growth for some years. "Buyers assuming that 5 to 10 per cent annual house price growth will be the norm over the coming years are very likely to be disappointed. Nevertheless a repeat of the late 1980s slump in prices looks unlikely [as] we do not foresee economic triggers arising that might cause widespread and sustained price falls."

He said the comments last week by Mervyn King, the Governor of the Bank of England, that the chances of a fall in house prices had risen, had probably hit confidence.

The Bank's own figures published yesterday showed that mortgage lending posted its smallest gain in nine months in May. Lending secured on dwellings rose £8.6bn, down from April's £9.4bn, although that still left mortgage borrowing up a record 15.3 per cent compared with a year earlier.

Unsecured lending rose by £1.58bn, up from a rise of £1.29bn. The combined rises took the total outstanding stock of debt to £993bn, just short of the £1 trillion mark.

Analysts said the slew of data pointing to a slowdown could discourage the Bank's Monetary Policy Committee from raising rates for a third consecutive month next week.