Lending growth boosts case for rate rise

Houses in an undated photo. Mortgage lending rose strongly again, building society mortgage approvals hit a record high and money supply growth picked up in January, bolstering the case for higher interest rates this year.

LONDON (Reuters) - Mortgage lending rose strongly again, building society mortgage approvals hit a record high and money supply growth picked up in January, bolstering the case for higher interest rates this year.

Interest rate and gilt futures extended losses after the data on Tuesday which suggest three rate rises since August have not yet affected the housing market significantly, while signs of excess cash in the system may fuel fears of higher inflation.

"It seems highly likely that interest rates will rise further still before long," said Howard Archer, an economist at Global Insight.

The British Bankers' Association said mortgage lending rose 5.6 billion pounds last month, compared with a downwardly revised 5.7 billion rise in December and similar to the robust average over the previous six months.

Furthermore, the Building Societies Association said seasonally adjusted approvals -- loans agreed but not yet made -- hit a record 5.949 billion pounds last month while net advances amounted to a 1.613 billion, a record for January.

The high level of home loan approvals indicates further strength to come in the housing market despite some surveys showing signs of peaking house price inflation as Britons contend with the three rate rises.

RECORD LENDING, EXCESS CASH

Separately, the Council of Mortgage Lenders said gross mortgage lending hit an all-time January high of 26.8 billion pounds, although it cooled from December's 28.6 billion. "We expect this strength to continue over the next few months," said CML director general Michael Coogan.

However, analysts expect rising borrowing costs to weigh on demand for housing eventually. The Bank of England kept rates steady at 5.25 percent this month but financial markets are pricing in one more rise this year.

The BoE warned this week against ignoring data showing strong money supply growth because it may prove inflationary.

Provisional figures on Tuesday showed annual broad money supply growth picked up to 13 percent last month from 12.8 percent in December.

"Excessively strong monetary expansion is probably right at the top of the BoE's priority (list) right now. These numbers probably tilt the risks to a further hike as soon as the March Monetary Policy Committee meeting," said David Brown, economist at Bear Stearns."

While higher borrowing costs may not have hit the housing market yet, there are signs that consumers are moving away from borrowing with abandon on their credit cards amid record personal insolvencies and rising living costs.

Credit card lending fell for a sixth straight month. It was down 496 million pounds in January, according to the BBA, more than double the average fall of 219 million over the last six months.

"It appears that while households' appetite remains high to borrow to fund a house purchase, those same households are much less willing to finance consumer spending through credit," said John Butler, an economist at HSBC.

That may come as some relief to Britain's retail banks who have seen their profits suffer because of bad debts.

Barclays said on Tuesday its impairment charge rose 37 percent from 2005 to 2.15 billion pounds last year, although the bank said it believed the worst was now over.