Bank catches housing jitters

Bank of England policymakers are expected to leave interest rates at 4.75 per cent for the fifth successive month on Thursday as they watch the housing market downturn gather pace.

Interest rate doves on the nine-member Monetary Policy Committee surprised the City by mooting the idea of a rate cut at their December meeting for the first time since summer 2003; but analysts believe Bank governor Mervyn King will urge them to wait for more evidence.

'Rates aren't going to come down any time soon: they've wrestled to get the housing market and consumer borrowing under control and, having done that, they're not going to rush to cut rates,' says Ross Walker, UK economist at Royal Bank of Scotland. He added that a strong round of pay deals in the spring could fuel inflation and lead to one more rate rise.

John Butler, chief UK economist at HSBC, who is still forecasting at least one further increase in borrowing costs by the end of the year, said the MPC would be watching to see whether homeowners have begun to cut back on spending as they watch the price of their homes wobble.

'I think it's not too early to say that the housing market's turned, and the turnaround in the summer was reminiscent of the early 1990s: the question is, does that mean we're going to see a hard landing?' he says.

At his last quarterly inflation briefing on the state of the economy, King pointed to evidence that the link between consumer spending and house prices had been broken, and a CBI survey suggesting retail sales were resilient in November seemed to support his point last week.

Latest housing market statistics underlined the case for the MPC to hold fire. Halifax says prices increased by 1.1 per cent in December, while Nationwide showed them falling by 0.2 per cent.