Latest hike in interest rates dents consumer confidence

THIS MONTH's surprise hike in interest rates dented consumer confidence, which fell for only the second time in a year, according to a key survey published today. The number of households expecting the state of the economy to deteriorate also rose this month while the number predicting an improvement dipped.

The news will come as a relief to the Bank of England, which cited the strength of the consumer economy when it raised rates to 5.25 per cent three weeks ago.

However, the survey came as separate figures showed that consumer borrowing remained at historically strong levels despite a surprise fall in August, while house prices are rising at 11 per cent a year.

The survey, carried out by GfK on behalf of the European Commission, found confidence fell to its lowest level since April. "The surprise rate rise is likely to have contributed to this fall in confidence as the succession of rate cuts undoubtedly played an important part in the recovery of confidence following the Asian crisis," GfK said.

GfK said the loss in confidence in the state of the economy was difficult to explain at a time when the economy was enjoying "rude health". Unemployment has dipped to a 19-year low, inflation is at a 36-year low and house prices are steaming ahead at their fastest rate for 10 years.

"It is difficult to explain why pessimists continue to outweigh the optimists when questioned about the economy," GfK said. "Falling confidence ... could be attributed to a pragmatic belief that the economy is currently riding the crest of a wave that will be difficult to sustain."

GfK said its survey showed a widening gap between the rich and poor, suggesting the "emergence of two nations". The lowest earners are as pessimistic as they were during the depth of the 1998 crisis while the top earners' optimism has hit its highest levels on record.

Meanwhile, figures from the Bank of England showed consumers borrowed pounds 1.2bn, down from July's pounds 1.3bn and forecasts of pounds 1.4bn. Net mortgage lending was down to pounds 3.22bn from July's six-month high of pounds 3.40bn. Dharshini David , an economist at HSBC, said the underlying trend remained firm with gross total lending at a record pounds 12.6bn.

The price of the average home rose 1.3 per cent in September, according to Nationwide, its second strong monthly performance following 2.5 per cent in August. Prices are 11 per cent higher than a year ago.

The pound fell back sharply yesterday on profit-taking following yesterday's surge to an eight-month high against the dollar. Sterling closed in London at $1.6436 compared with Tuesday's high of $1.6516, while its index against a basket of currencies fell to 105.2 from 106.6. The pound has risen on growing speculation the Bank will hike rates as soon as next week.