The widely expected quarter-point base rate hike on November 6 clearly signalled the turning point in the interest rate cycle. Many economists are betting on another increase sooner rather than later leading to a base rate of around 5% by the end of next year as inflationary pressures build.

The trigger for this first increase in borrowing costs in nearly four years was news of a smaller than expected slowdown in household spending and a more buoyant housing market, combined with a continuing headlong dash into debt by consumers.

Government figures point to a rise of 1.2% in retail sales in the third quarter – only slightly weaker than the 1.5% increase in quarter two. In October sales rose at their fastest year-on-year rate for 18 months and were broadly based, according to a CBI survey. But the British Retail Consortium says the improvement in overall sales in October was fairly subdued, and that furniture sales remained poor, although carpets and flooring sales continued to improve. Publication of official monthly figures on furniture sales has been suspended, so the exact state of play will have to await release of quarterly consumer spending estimates.

Inflation data for October suggest that while consumer prices overall rose by 0.1% during the month and by 2.6% annually, the average price of furniture in the high street fell by 1.2% on the month but was 2.5% higher than in October last year.

Housing activity

Housing market activity picked up in the third quarter following a lacklustre start to the year. The house price index compiled by the Financial Times shows that prices rose by 1.9% in October – the fastest monthly increase since March – while the annual increase was 7.8%, compared with 2.9% in September.

Housebuilders say that both current activity and new orders grew sharply in October, which suggests that the housing boom is set to continue for several months at least. According to a Chartered Institute of Purchasing and Supply/NTC Research survey, growth in construction overall during the month rose to its highest level in more than two years.

Net mortgage lending soared by £8.8bn in September, £1.1bn more than the rise in August. The number of loans approved for house purchase was 136,000, compared with an average of 117,000 in the three months to August, and the value was £30.9bn, £4.2bn higher than the June to August average. Consumer credit grew by £1.8bn on the month, £0.3bn more than the rise in August, but the 12-month growth rate fell to 13.4%, from 13.7% in August.

Consumer borrowing

Consumer borrowing leapt in total by a record £10.7bn in September, or 1.2%, and was £1.4bn more than the rise in August. The 12-month rate of increase rose to 14% from 13.9% in August and the three-month annualised growth rose to 14.3% from 14%.

Ahead of the rise in borrowing costs businesses were cautiously optimistic about prospects for the coming year. The quarterly confidence indicator from the Institute of Chartered Accountants in England and Wales and the Alliance & Leicester Commercial Bank rose to 3.6, from 3.3 in the second quarter. But the services sector was significantly more confident than manufacturing.

A poll by the Recruitment & Employment Confederation and Deloitte & Touche found that demand for new staff in October increased at its sharpest rate since February 2001. And the upsurge, combined with pockets of skill shortages, helped push up salaries for newly hired workers.

But higher wages and borrowing costs will further cloud the outlook for manufacturers, whose output was flat in the third quarter and down 0.2% compared with year earlier. However, the wood products sector, where output was up by 1.7% between the two latest quarters, provided one bright spot.