Bank set to lift interest rates

An interest rate hike in August looks "nailed-on"

The Bank of England is expected on Thursday to raise UK interest rates by a quarter of a percentage point to 4.75%, economists have said.

The Bank of England's rate-setting committee last raised rates in June from 4.25% to 4.5% in an effort to cool inflation and house prices.

Though house price growth has slowed slightly since then, other factors also suggest a rate rise is likely.

These include strong manufacturing figures and record consumer borrowing.

News that manufacturing powered ahead at its fastest pace in a decade has even triggered talk that the MPC will raise rates by as much as a half point to 5%.

'Clobber option'

A hard clobber by the Bank of England may be the only way to dampen soaring consumer borrowing, which has now hit the £1 trillion mark, some economists say.

VOTE RESULTS Should the Bank of England raise rates? Yes, to chop consumer spending 21% Yes, to cool the housing market 48% No, for manufacturing's sake 20% No, house prices should continue booming 11% 10170 Votes Cast Results are indicative and may not reflect public opinion Vote now closed

The economy grew by 0.9% in the second quarter, much faster than its long-term trend rate, and retail sales grew by 1.1% in June, enough to also encourage a tougher stance from the Bank.

However, homeowners are likely to be spared this scenario given that inflation remains below the MPC's 2.0% target, while one industry report showed retail sales growth slowing sharply in June.

"The MPC is caught between a rock and a hard place. Does it choose the cautious or the clobber option?" said Graeme Leach, chief economist at the Institute of Directors.

Aggressive monetary tightening at this stage might be too much of a shock for heavily-indebted consumers and the CBI has already warned that a half point rise would be "a real blow to business".

But whatever happens, the only way is up, economists say.

"The only issue is how fast rates should rise," said George Buckley, UK economist at Deutsche Bank.

Cooling down

One relief for the Bank of England is that there is more evidence that the housing market is slowing down.

On Wednesday, Halifax reported an easing in price growth for the second month running.

The UK's biggest mortgage lender said property prices rose by 1.3% in July after a gain of 1.2% in June, both of which were well below the average monthly rise of more than 2% seen during the previous six months.

However, these figures contrast with data from Nationwide Building Society, which last week said prices soared ahead by 2.1% during July.

But recent surveys from the Royal Institution of Chartered Surveyors and the National Association of Estate Agents both backed Halifax's stance and reported that the market was slowing.

"Taken on their own, the observations from Halifax would suggest that house price inflation is beginning to cool down," said Philip Shaw, an economist at Investec.