Rate cut pressures as mortgage approvals dive

By Matt Falloon and Christina Fincher

LONDON (Reuters) - Mortgage approvals fell in December to the lowest since at least 1999, Bank of England data showed on Wednesday, the strongest sign yet that house prices could fall sharply this year.

The weaker than expected figures will pile further pressure on the Bank of England to cut interest rates next week from the current 5.5 percent and follow that up with concerted easing throughout the year.

A sharply slowing housing market also comes at a bad time for a Labour government which has staked its reputation on the economy and is still trying to fix the Northern Rock crisis to win back voters' confidence ahead of an election due by 2010.

A separate survey also showed inflation expectations spiking to record levels this month, adding to the economic headache facing politicians and monetary policymakers alike.

"For the time being at least, the Bank of England is likely to cut interest rates gradually as it carries out a difficult balancing act of trying to support growth while containing underlying inflation pressures," said Howard Archer, an economist at Global Insight.

The Bank figures on Wednesday showed mortgage approvals for house purchases fell for a seventh consecutive month to 73,000 in December from a downwardly revised 81,000 in November, well below analysts' expectations for a reading of 79,000.

"There is growing evidence that despite the recent fall in interbank lending rates, the damage of the credit crunch has already been done," said Vicky Redwood, UK economist at Capital Economics.

"The question now is not whether house prices will fall, but how much they will fall."