Fresh drop in house prices eases fears of rate rise

Falls in house prices, car sales and business recruitment have strengthened expectations in the City that the Bank of England will leave interest rates on hold next week.

Falls in house prices, car sales and business recruitment have strengthened expectations in the City that the Bank of England will leave interest rates on hold next week.

The price of the average home dropped by 0.5 per cent in February, the steepest drop for four months, taking the annual inflation rate to a three-year low of 12.1 per cent, Halifax bank said. The decline followed two months of healthy rises, which Halifax said was consistent with a gradual slowdown rather than a property crash.

Martin Ellis, the bank's chief economist, said: "That's quite a sharp slowdown, and it is a slowdown but it's nothing worse than that. Estate agents are reporting signs of a stabilisation in activity, with a recent increase in the number of sales agreed and a levelling out in the level of number of new buyer enquiries."

"Some months they go up, and some months they go down," he said, adding that prices had risen by just 0.8 per cent in the seven months since last July.

Mr Ellis said the slowdown would be sufficient to avert another increase in interest rates, which have risen 40 per cent since November 2003, and provide scope for the Bank to cut them later in the year.

He said a lot of commentators in the City had got "too excited" over possible rate rises after recent comments by members of the Bank's Monetary Policy Committee warning of inflationary pressures.

"I think that these figures back up the Bank's forecast that show prices are slowing," he said. He added that even if the Bank did raise rates again it would not make "a huge amount of difference" to the property market.

Meanwhile the Recruitment and Employment Confederation said growth in permanent job placements slowed to its slowest pace in nearly two years last month. "Recruitment activity growth continued to cool in February," said Brett Walsh from the accountants Deloitte, which produced the report jointly with the analysts NTC. "Employers will be relieved to see that recent difficulties with candidate availability are beginning to ease," he added.

All of the 50 economists polled by Reuters forecast that the MPC would leave rates unchanged at 4.75 per cent. Alan Castle at Lehman Brothers said: "It makes sense for the MPC to reserve judgement."