Bank of England Faces Pressure to Raise Interest Rates Amid Surging Mortgage Lending and Growing Money Supply

Strategic Insights -

The Bank of England is likely to increase interest rates this week, despite some mixed signals from its own data, as a surge in mortgage lending and a record-high money supply raise concerns about inflation. The number of mortgages approved in June rose to 120,000, exceeding economists' predictions, while the net lending figure was lower than expected at £9bn. Meanwhile, the annual growth of M4, a key indicator of money supply, hit 13.5% in June, its fastest pace since November 1990.

Key Takeaways:

  • Mortgage lending jumped in June, with the number of approved mortgages reaching 120,000, significantly higher than economists' predictions.
  • Despite a lower-than-expected net lending figure of £9bn, consumers are replacing unsecured debt with mortgage-backed loans, according to economist Peter Dixon.
  • The Bank of England's estimate of M4 growth hit 13.5% in June, the fastest pace since November 1990, raising concerns about inflation.
  • Economists warn that strong domestic demand growth, fueled by a robust housing market and a buoyant economy, may prompt the Bank of England to raise interest rates.
  • Peter Dixon expects net credit figures to hover around £1bn-a-month for the next few years, indicating a cautious approach to borrowing.
  • The Bank of England's decision on Thursday is expected to be one of the tightest in recent times, amid speculation that interest rates will be increased.

Statistics:

  • The number of mortgages approved in June rose from 117,000 to 120,000.
  • Net lending was lower than forecasts at £9bn.
  • The amount owed on credit cards rose by the smallest amount recorded for 12 years.
  • M4 growth hit 13.5% in June, its fastest pace since November 1990.
  • Exports are powering ahead, fuelled by a recovery of euroland domestic demand.
  • The UK economy is operating slightly above potential, prompting some economists to warn of inflationary consequences.

Sources:

  • The Bank of England, "Bank of England Quarterly Inflation Report"
  • Commerzbank, "Economic Insights"
  • Lombard Street Research, "Market Analysis"