Consumers on pounds 1bn credit binge

A surge of more than pounds 1bn in consumer credit in July, along with a further rise in house prices in August, provided the Bank of England with more ammunition yesterday in its case for higher interest rates.

But many City analysts still expect the Chancellor of the Exchequer, Kenneth Clarke, to announce another quarter-point reduction this autumn - perhaps as early as Wednesday, after his meeting with Bank Governor Eddie George.

A further cut would allow the Goverment to gurantee a consumer recovery in the run-up to the general election.

"There can be little doubt that Ken Clarke will go for one more cut in base rates," said Bill Martin, chief economist at investment bank UBS. Most City experts see the fear of having to reverse the move before the election as the only restraint on the Chancellor's desire to stoke the economy.

Further disagreements between Mr Clarke and Mr George are on the cards, as the latest Inflation Report made it clear that the Bank thought June's quarter-point reduction in base rates to 5.25 per cent was a mistake. Earlier this month chief economist Mervyn King raised the spectre that Mr Clarke might join the ranks of Conservative Chancellors who had given their name to an economic boom.

Further signs of strength in the United States economy, pointing to the likelihood of higher rates across the Atlantic from next month, unsettled the financial markets again. Wall Street is likely to remain on edge until the key August employment figures are published at the end of next week.

In London the FT-SE 100 index ended more than 17 points lower at 3,867.6. By mid-morning the Dow Jones index had fallen by as much as 54 points to 5,614.73. Volumes traded were low in advance of the long Labor Day holiday weekend.

Net consumer credit in the UK rose by just over pounds 1bn in July, considerably more than expected. Borrowing from banks and on credit cards was particularly strong, both at the highest since the record loan surge in April.

The monthly figures can be volatile and are not directly linked to consumer spending. But the annual rate of growth in consumer credit has shown a strong upward trend. It climbed to 14.8 per cent in July, up from 14.3 per cent.

"These numbers strongly support the view that consumers are feeling increasingly confident about the future," said Jonathan Loynes at HSBC Markets.

William Waldegrave, chief secretary to the Treasury, said the data showed consumers "are increasingly confident on their own prospects and the outlook for the economy as a whole."

The steady revival in the housing market is also boosting consumer confidence. Nationwide Building Society yesterday reported that the year-on-year increase in house prices had climbed to 5.4 per cent this month.

Separate Bank of England figures showed that net mortgage lending rose to pounds 1.5bn in July, up from pounds 1.4bn the previous month. The number of mortgage approvals rose by 7,000 to 95,000.

In the US it was manufacturing industry that showed unexpected signs of buoyancy, casting doubt on predictions that the pace of economic growth would slow in the second half of the year. A growing body of Wall Street analysts believes the Federal Reserve will be forced to raise interest rates after its next policy meeting on 24 September.

The Chicago area Purchasing Managers Index, which forms part of next week's National Association of Purchasing Managers survey, jumped to 60.0 from 51.2 in July. The rise so far above the 50 watershed between boom and bust was unexpected.

In addition, factory orders rose 1.8 per cent in July compared with June's 0.7 per cent rise. There was also extra evidence that American consumers remain optimistic.