Lenders urge Bank to raise rates

Mortgage lenders yesterday urged the Bank of England to raise interest rates in a pre-emptive strike on Britain's overheating housing market to prevent the boom turning into a disastrous repeat of the early 1990s crash.

Reporting a record surge in mortgage lending for the third month in a row in May, the Council of Mortgage Lenders said the Bank should raise rates "modestly" now to engineer a soft landing for the market that would avoid the need for more drastic steps in the future.

"A modest rise in interest rates this summer would help ensure that the housing market is sustainable in the future without causing payments difficulties for the overwhelming majority of borrowers," said Michael Coogan, the CML's director general.

This is the first time the CML has called for a rate rise in its 10-year history of representing the major banks and building societies. "This is an unusual step for the CML, and reflects clear worries about the sustainability of house price rises and the accumulation in mortgage debt," said George Buckley, UK economist at Deutsche Bank.

CML figures showed that gross mortgages rose by £19.5bn in May - an increase of nearly 20% over April's total. "Record figures for the third month in a row suggest that lending could now be on course to top £200bn in 2002," said Mr Coogan.

New house purchases rather than remortgaging is driving the market, according to the CML. Loans for new homes rose by a third to £12bn. "These data suggest no slowdown in house prices should be expected over the next three months and they continue to point to annual inflation breaching 20%," said Danny Gabay, UK economist at JP Morgan.

CML representatives met with Lord Rooker, the housing minister, yesterday to discuss their concerns about the market. Warning borrowers to take steps to protect their mortgage payments in case of job loss, Mr Coogan said a stable market was essential to make homeownership secure for all borrowers.

The CML's warning about the dangers of the market overheating echoes warnings from the Bank's deputy governor David Clement who told the treasury select committee earlier this month that the level of house price inflation was "unsustainable and the longer it goes on then the sharper is likely to be the final adjustment".

But the Bank's monetary policy committee is in a difficult position with manufacturing still weak and few signs of any inflationary pressures outside the housing market. Sir Eddie George told the treasury select committee that the Bank's task was to keep inflation at the government's 2.5% target, not to rein in house prices unless the boom threatened to spillover into other areas of the economy. Few city analysts expect the Bank to take action at its monthly rate meeting next week.

Government figures released yesterday showed that Britain's public sector finances swung back into the red last month, although the shortfall was smaller than economists had expected. The office for national statistics reported a public sector net cash requirement of £2.64bn for May. City analysts had been expecting a deficit of around £3.6bn.