BoE hints at rate rise after surge in mortgage lending

The next move in interest rates will be up, the Bank of England hinted yesterday as fresh figures showed the UK is being squeezed between a consumer boom and decline in manufacturing.

The Bank's monetary policy committee (MPC) voted unanimously to keep rates at a 48-year low of 3.5 per cent but debated both cutting and raising rates.

The minutes said: "The current level of rates continues to imply that the policy stance is accommodating. At some stage this expansionary stance will have to be moderated.

"But on the central projection, inflation will be below target for much of the forecast period, which suggests that a rise in rates is not yet appropriate."

Figures yesterday showed mortgage lending hit an all-time high for the second month running in July as households took on £25bn of new debt, but later today the Confederation of British Industry will cut its economic growth forecasts.

The Bank said the economy was out of balance with house prices and borrowing rising faster than expected but overall economy growth weaker than expected.

Analysts said despite the reference to an eventual tightening of policy, rate rises looked a distant prospect while inflation was seen falling below its target and the global economy looked fragile.

"The comments are more hawkish than in recent months," said Adam Cole, of Credit Agricole. "But there is nothing to really suggest rates will rise in the very near term."

The boom in consumer spending delivered a much-needed lifeline to Gordon Brown, the Chancellor of the Exchequer.

A record increase of 14 per cent in VAT receipts offset a disappointing increase in corporation tax receipts. However government spending is running 12 per cent higher than a year ago. "The Government continues to spend like there's no tomorrow," said Nick Verdi, UK economist at Barclays Capital.

On a cumulative basis the public sector net borrowing has risen to £13.6bn after four months - exactly half what Mr Brown is forecasting for the year as whole.

Jonathan Loynes, chief UK economist at Capital Economics, said he expected the deficit to hit £34bn this year. "But the risks of an even higher number are growing."