House price boom 'heading for slowdown'

Last updated at 13:16 12 May 2004

The booming growth in house prices is set for a sharp slowdown during the next two years, the Bank of England has warned, as spending eases and inflation rises gradually.

Prices may well continue to rise strongly in the near term, underpinning strong growth in consumer spending, the Bank's quarterly inflation report said.

But spending will ease as growth in disposal income moderates and house price inflation slows, the Bank said.

Northern Rock became the latest lender to announce it was increasing its mortgage rates today following last week's interest rate hike.

Economic growth to pick up

Economic growth is expected to pick up to well above trend in the near term, sustained by continued buoyancy in household and government spending and the revival in business investment.

But the rate of expansion is predicted to drop back as consumer and public spending growth moderate, the Bank said.

Bank of England governor Mervyn King said a synchronised economic recovery around the world seemed to be well under way.

Signs of current and prospective strengthening of demand have led the Bank's Monetary Policy Committee to raise its projection for output growth in the near term, he said.

Inflation is likely to rise gradually, despite the lower than expected figures in March.

The Bank said it was more likely than not that

inflation would exceed the Government's 2% target in the medium term.

Mr King said recent sharp rises in oil prices reflected the world recovery, higher desired levels of inventories and political uncertainties.

He said they represented "a key risk to the near term outlook".

Mortgage rates

Northern Rock, which is based in Newcastle upon Tyne, said it was raising its standard variable mortgage rate to 6.29% from 5.99% from June 1 for existing borrowers and with immediate effect for new ones.

It is the first of the big lenders to increase its rates by more than the 0.25% interest rates were increased by.

Earlier this week the UK's biggest mortgage lender Halifax said it was passing on the full 0.25% rise to customers, joining Cheltenham & Gloucester, Abbey, Barclays and The Woolwich in increasing their standard variable mortgage rate.

• Unemployment figures out today showed that unemployment has reached a new low and more people are in work than at any time since 1984. A total 1.41 million people were jobless in the three months to March, and the unemployment rate now stands at 4.7%, the lowest since records began 20 years ago.

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