Record equity withdrawal by homeowners triggers fears of early interest rate rise

Homeowners embarked on an unprecedented borrowing binge last year, extracting more money from the rising value of the properties than at any time in recorded history.

Bank of England figures yesterday showed that mortgage equity withdrawal (MEW) - loans not used to buy a home - hit an all-time record of £16.2bn in the final three months of last year. It took the total for 2003 to £53bn, outstripping the entire economic output of Ireland.

The Bank expected MEW to hit a new record but the size of the jump - from £13.6bn in the previous quarter - may ring alarm bells over a possible property crash and trigger a rise in interest rates as soon as next week. And in a finding that may alarm the Bank, households are borrowing more as a share of disposable income - 8.3 per cent - than they have done since the Bank started keeping records in 1970.

"If one were looking for that extra bit of data to pin an April rate hike, then one need look no further than this," said George Buckley, UK economist at Deutsche Bank. One housing expert said the strength of the numbers could force the Bank, whose governor is Mervyn King, to order a rise in rates. Alex Bannister, group chief economist at Nationwide building society, said: "The Bank wants to see lower [MEW] numbers and I would not surprised if they went for a half-point in May."

Meanwhile there was fresh evidence of further growth on the industrial side of the economy as manufacturing firms reported a pick-up in activity last month.

The MEW numbers are the latest to point to a housing market boom. Mortgage lending hit an all-time high in February, according to the Bank, while house prices are rising at the fastest pace for 18 months Halifax, the UK's largest residential mortgage lender, produces its March figures today.

Analysts said the equity withdrawal data would strengthen the hand of those on the Bank's monetary policy committee who are expected to argue for an immediate rise in interest rates next week. Simon Rubinsohn, chief economist at Gerrard stockbrokers, said: "Crucially consumers remain unbowed by the half-point tightening in policy already sanctioned and there appears increasing evidence that the economic recovery is spreading out to the manufacturing sector."

The Chartered Institute for Purchasing and Supply said output, orders and prices charged by manufacturers all accelerated last month according to its poll of 620 companies. However other economists said there was little evidence that borrowers' seemingly insatiable appetite for debt was translating into a spending spree that could threaten its inflation target. Figures on Wednesday showed that retail sales grew at their slowest pace for six months in March while official figures showed prices across the high street fell by 1 per cent in February.

Research by the Bank of England in 2001 showed homeowners used MEW mainly to pay down more costly unsecured debt, rebuild savings or to spend on home improvements that add value to their property.

Alan Castle, UK economist at Lehman Brothers, who believes the Bank will raise rates in May, said: "All in all, the pick-up in MEW is probably more a reflection of the situation in the housing market rather than a signal of unsustainable consumer strength."

Nationwide's Mr Bannister said he doubted the Bank would be concerned about the rise in equity withdrawal. "Everything was teed up to produce a record number as much of its brought about intentionally by the Bank," he said. "But it has now done its job in getting the economy through a tough period for the world economy - you only have to look at euroland where things are not rosy - but they will look to bring these numbers down by nudging up rates." He added that he would not be surprised if there was a half-point rise in May.

Economists agree that with inflation far below the 2 per cent target at 1.3 per cent and several members of the MPC warning about the impact of the strong pound, next week's decision will be one of the most difficult the MPC has to make.