Economics: The UK economy has reached an interesting point in the economic cycle, with signs emerging that the housing market is cooling. Some argue that a sharp correction in house prices has begun and there is, therefore, no need for any further rate increases by the Bank of England.

If so, we would have the extraordinary sight of interest rates having peaked in one economy, whereas in another, the euro zone, rates have yet to move off the cyclical floor.

The Bank of England started to tighten monetary policy last November, when the repo rate was 3.5 per cent, on the basis that the economy was set to grow strongly, which would eventually pull inflation up to and then above its 2 per cent inflation target.

The inflation rate has remained stubbornly low since then (it is currently 1.3 per cent) but the bank has stuck to its guns, generally raising rates by a quarter of a point every three months, coinciding with the release of its Inflation Report, which includes a detailed forward projection of its growth and inflation forecasts.

The Bank of England did deviate from this measured pace on one occasion, when it raised rates in May and June, and the June hike no doubt partly reflected concern about the housing market, which had gathered a strong head of steam over the spring months.

House-price inflation, for example, had slowed steadily in 2003, from 25 per cent to 15 per cent, but picked up momentum again from the first quarter of 2004, with the annual rate of inflation exceeding 19 per cent in the early summer. Mortgage lending also strengthened, setting new records, exceeding £9 billion (€13 billion) a month from December and reaching £9.5 billion in April.

The Bank of England's published research shows that the UK housing boom has not boosted consumer spending, and that householders are borrowing a lower proportion of the value of their property than in the past. The conclusion is that spending, and therefore economic growth, would be less affected than previously from any given fall in house prices.

Yet some on the Monetary Policy Committee, which sets UK interest rates for the Bank of England, argued for a rate rise in June in order to curb the demand for debt and hence contain the vulnerability of the economy to a housing shock.

The repo rate is now at 4.75 per cent following the most recent rise in August, and there is evidence that the housing market is finally responding. Mortgage approvals, for example, averaged 125,000 per month in the first quarter of 2004 before easing to 119,000 in the second. In July, however, approvals fell to 100,000 and August saw further weakness, with an approvals total of 96,000, the lowest in four years.

Mortgage lending has also slipped, easing to £8.7 billion in July and £8.4 billion in August, although the August figure still represented a 15 per cent annual increase. All of the above figures are published monthly by the Bank of England and, as such, leave no room for ambiguity.

But the trend in house prices is often more difficult to discern in the short term because there are a variety of information sources, which can throw up conflicting signals, although these tend to move more in harmony over a longer time frame. The two most widely quoted house-price indices, for instance, showed a divergent pattern in July, with prices rising by 0.1 per cent on the Nationwide Index but falling by 0.6 per cent on the Halifax index.

More timely data is provided by the RICS survey, available to August and based on a sample of surveyors. This showed house price falls outnumbering price gains for the first time since the summer of 2003, and a decline in the number of houses sold.

Reports from estate agents also support the view that prices have stalled or fallen back, albeit marginally, in August and September.

Sentiment in the housing market has taken a knock, and if one looks at affordability it is clear that the combination of higher mortgage rates and higher debt levels can be expected to further dampen mortgage demand, although the most likely outcome remains that of a gradual slowdown - a soft landing - rather than a crash.

The evidence on borrowing and house prices certainly supports the case for a moderate cooling, as does the broader economic picture in the UK, which remains remarkably healthy - the consumer is still spending freely, business investment remains on an upward path, and the labour market continues to tighten, with the number claiming unemployment benefit continuing to decline.

On that basis, it may be premature to announce that the UK rate cycle has peaked, and the Bank of England may stick to its established pattern of rate increase until it sees more convincing evidence that the economy is no longer growing above its long-term trend. Another quarter point increase still looks on the cards for November, taking the repo rate to 5 per cent.

Dan McLaughlin is chief economist, Bank of Ireland