Rates dilemma as services cool
THE predicament facing Britain's interest-rate setters grew today with the release of figures showing the service sector has slowed while mortgage lending surged to a new record.
The Bank of England's monetary policy committee started its monthly two-day meeting under Governor Sir Edward George today and is widely expected to adopt a wait-and-see approach, leaving interest rates at 4% again. But the Bank's own figures today showed homeowners and buyers broke yet more records for taking out loans secured against property in May.
An astonishing £6.8bn increase was the highest recorded since the Bank started collecting data in 1993, representing an extra £425 of debt for every owner-occupied household in the country. Overall total personal lending went up by a record £8.3bn - equivalent to £188 for every adult. The figures came hard on the heels of the Nationwide building society's findings that house prices have rocketed nearly 20% in the year to the end of June.
Interest rates at 38-year lows have sent homeowners rushing to lenders to take on new debt. Only last week, the Council of Mortgage Lenders urged the MPC to raise rates for fear that further delay would eventually force them to bring in painful sharper rises further down the line.
Analysts said the near-£7bn rise in secured lending would mostly have been on variable rates, leaving borrowers exposed to future rises in the cost of borrowing. JP Morgan economist Danny Gabay said: 'I am getting increasingly concerned about the extent to which people are mortgaging themselves up to the hilt - £7bn is a phenomenal amount of money.' The roaring housing market should overshadow the MPC's concerns about global economic and political tensions and falling share prices, he added.
But survey evidence today also pointed to a cooling of the all-important service sector of the economy. Retail sales growth slowed to an 18-month low in June, according the CBI, which said that while 45% of firms reported that sales rose, 29% saw a fall, leaving a balance of plus-16 - the lowest since December 2000.
Meanwhile, the broader service sector also slipped last month from May peaks. The Chartered Institute of Purchasing and Supply's Purchasing Managers' Index of services companies came in way below City forecasts. The index fell to 54.9 from 56.7 in May.
