National Institute calls for half-point rate rise

The Bank of England must order a half-point rise in interest rates next week for the first time in a decade to prevent soaring house prices triggering a surge in inflation, a leading economist said yesterday.

Martin Weale, the head of the National Institute of Economic Social Research, warned the Bank's "leisurely" approach to raising rates would fail to keep inflation under control. "There is a strong case for the Monetary Policy Committee to influence expectations more forcibly by raising rates by half a percentage point to 5 per cent when it meets in August," he said.

His warning came as new figures showed that house prices jumped 2 per cent this month to take the annual inflation rate to a 14-month high of 20.3 per cent.

Nationwide building society said the strength of the market had defied its forecasts that the monthly growth would slow to 0.5 per cent. It also contradicts a raft of anecdotal evidence from estate agents that sellers have started to cut prices in the face of a fall-off in demand.

Paul Smith, the chief executive of haart estate agents, said he was "shocked" by Nationwide's figures. "These data fly in the face of everything we are seeing across our network," he said. "House price surveys such as these have an impact interest rate decisions, so it is vitally important they accurately reflect the market situation."

Separate figures from the Bank of England showed that mortgage lending rose at a record rate in June for the third successive month to take the total stock of outstanding debt through the £1,000bn mark. Homebuyers borrowed £9.18bn, below May's £9.35bn increase but a record annual rate of growth of 15.3 per cent.

Unsecured lending increased particularly sharply, by £2.05bn, to take total monthly borrowing to within a whisker of last September's record of £11.24bn. Simon Rubinsohn, at Gerrard stockbrokers, said the welter of strong figures, showed that the four rate rises since November had been insufficient to rein in consumers and slow house prices. "This suggests the MPC may move away from its gradualist approach and that it might raise interest rates further than is currently being anticipated by markets,"he said.