House price rises and a squeeze on disposable incomes led to a steep increase in the amount of cash people took out of their homes last year to fund their spending.

The figures will worry hawks on the Bank of England's Monetary Policy Committee, which meets this week to discuss interest rates. The MPC is widely expected to keep rates on hold this month, although economists are predicting another increase before the summer.

Figures from the Bank of England showed that mortgage equity withdrawal (MEW) rose to £14.6 billion in the fourth quarter of 2006, up from £12.2 billion in the previous three months.

For the full year, MEW totalled £49.7 billion in 2006, up from £36.6 billion in 2005. Economists said that the increase helped to bolster spending on the high street amid slower growth of unsecured debt.

Alan Clarke, the BNP Paribas economist, said: “Clearly the wealth gains associated with rapid house price inflation are being used to finance spending growth."

Figures released last week showed that retailers have enjoyed buoyant conditions despite three interest rate rises in seven months. The CBI’s latest snapshot of the high street, leading retailers said March was their strongest sales performance since the end of 2004.

At the same time, Bank of England lending data showed a renewed acceleration in mortgage borrowing in February, while home loan approvals were stable, suggesting that signs of the property market cooling off remain very uncertain.

The strong rise in MEW will also worry consumer groups, who have questioned how good a deal it typically represents.

Earlier this year, Which? gave warning that equity release schemes, which typically allow home owners to release cash tied up in their property to pay it back much later – after a homeowner's death, for example – as expensive and risky.

Which? Calculated that borrowing £80,000 against a property worth £350,000 could see a repayment of £256,570 being demanded after 20 years.

However, Howard Archer, the Global Insight economist, said that the pick-up in MEW in 2006 was also “encouraged by the very limited growth in households' real disposable income in 2006, as well as consumers' increased desire to fund their spending by cheaper measures than using credit cards or taking on unsecured debt”.

Separate figures showed that growth in the manufacturing sector slowed in March but remained robust, buoyed by solid expansion in output and new orders.

The Chartered Institute of Purchasing and Supply/Royal Bank of Scotland Purchasing Managers’ Index fell to 54.4 last month from a two-year high of 55.4 in February. Analysts had expected a fall to 55.1.

Economists said the figures give little cause to alter expectations that the Bank of England would leave interest rates on hold when its rate-setting Monetary Policy Committee meets this week.

Geoffrey Dicks, UK economist at RBS, said: “The UK manufacturing industry remains comfortably in expansionist mode even if the heady gains of February were not repeated in March.”

Meanwhile, in the US, manufacturers reported that the sector expanded at a slower-than-expected pace in March while raw materials prices rose.

The Institute for Supply Management said its manufacturing index came in at 50.9 in March, below the February reading of 52.3 and Wall Street’s expectation of 51. A reading above 50 indicates growth for the sector, while a reading below 50 indicates contraction.

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