Britain's recovery gathers pace

LONDON Fri Aug 30, 2013 2:00pm BST

A sold board hangs outside a property in Altrincham, northern England July 3, 2013. REUTERS/Phil Noble

A sold board hangs outside a property in Altrincham, northern England July 3, 2013.

Credit: Reuters/Phil Noble

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LONDON (Reuters) - A surge in mortgage approvals, a rise in house prices and higher consumer confidence and business lending added to signs of momentum in Britain's economic recovery on Friday.

Bank of England Governor Mark Carney said he was ready for the challenge of heading off any risk of a credit bubble, but stuck to his commitment to keep interest rates at rock bottom for years to come.

"Interest rates are principally an instrument of monetary policy for achieving the inflation outcome and there are other tools that address risks," he told the Daily Mail newspaper.

Figures from building society Nationwide showed house prices rose strongly for a fourth consecutive month in August. A jump in mortgage approvals - July's figure was the highest since March 2008 - suggests further gains in the pipeline.

"Taken alongside this morning's news of a further rise in house prices in August, July's household lending figures are likely to fuel speculation that the housing market is in the early stages of another boom," said Samuel Toombs at Capital Economics.

Carney said an unsustainable house price boom - the threat of which he played down earlier this week - would be better tackled by targeted measures, which could mean restricting mortgage credit or raising the amount of capital banks must hold to restrain home loans.

But in Friday's interview, he acknowledged that, with so many schemes encouraging people to buy homes, an attempt to cool the market would be like swimming against the tide.

The government's "Help to Buy" scheme, which helps people buy homes with a downpayment of just 5 percent, has been widely criticised by economists who say its biggest impact has been to drive up prices by making the housing market seem a one-way bet.

Heading off problems, Carney said, "would be difficult to achieve if there were a host of government policies or other events that are pushing in the other direction."

SUSTAINABLE OR NOT?

"Help to Buy" is not the only way the government is subsidising the housing industry. The "Funding for Lending Scheme" launched via the Bank of England a year ago has helped lower mortgage costs and increase the availability of loans.

The availability of cheaper credit, along with an easing of concerns about the euro zone has boosted Britain's economic prospects sharply since the start of the year. Growth of 0.3 percent in the first three months increased to 0.7 percent in the second.

The government is hoping the recovery will broaden out and become self-sustaining.

There is some room for optimism on that score. As well as rising house prices, recent economic data has shown stronger industrial output and a narrowing trade deficit, two areas that until now have been weak.

Figures on Friday showed business lending rose last month for the first time since January and two separate reports showed the raft of recent positive news on the economy has made British consumers and businesses more upbeat about the future.

The GfK NOP consumer sentiment index touched its highest level since October 2009 this month, rising more strongly than forecast.

And the British Chambers of Commerce revised up its gross domestic product forecasts to predict growth of 1.3 percent in 2013 and 2.2 percent in 2014 - 0.3-0.4 percentage points higher than its last forecast.

However, BCC director general John Longworth warned the recovery was not yet secure and future trouble in the euro zone and the Middle East as well as an economic slowdown in China could yet derail growth.

"We have had false dawns in recent years and although this upturn appears to be on stronger ground, we must be aware that complacency could lead to setbacks," Longworth said.

(Additional reporting by David Milliken and William Schomberg; Editing by Ruth Pitchford)

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