Fresh evidence of a slowdown in the housing market emerged today as the Bank of England's decision on whether to hold or raise interest rates appeared to hang in the balance.

According to Halifax, the nation's top mortgage lender, house prices rose by 1 per cent in March - the second smallest increase since August last year. It follows an increase of 1.8 per cent recorded by Halifax last month. It said then that there was evidence the market was "slowing".

In the first quarter, and following three increases to the cost of borrowing, house prices rose by 2.8 per cent, Halifax said, noting that this was "well below" the 4.2 per cent increase the previous quarter.

Tim Crawford, Halifax's group economist, said: "Prices continue to rise in a tight market but there are emerging signs that pressure on householders' finances partly due to the rise in interest rates since last summer, are dampening housing demand with evidence of reduced market activity."

Interest rates currently stand at 5.25 per cent, with the Bank due to unveil the monthly decision of its Monetary Policy Committee at noon.

Many economists argue that one more rate rise is necessary to dampen the UK's booming economy and quell inflationary pressures. With further evidence amassing that the stock market correction that began last month has now passed its course, there is little reason to wait, they say.

George Buckley, an economist at Deutsche Bank, said that "on balance, we expect the MPC will vote for a 0.25 per cent tightening. That is not to say this is not a close call - indeed we see significant risks for an unchanged decision today."

The Times' own MPC recommended that the Bank keep rates on hold this month but only by a narrow five votes to four.

Today's survey from Halifax, the most bullish of the mortgage lenders, echoes findings last week from Nationwide, which suggested that house prices grew by just 0.4 per cent in March.

Nationwide still argued that the market will remain "fairly firm in the short term" and calculated that annual house price inflation was running at a healthy 9.3 per cent.

Halifax reported today that annual house price inflation was running at 11.1 per cent, but "for purely arithmetic reasons, reflecting the strength of the housing market in early 2006".

The lender added: "House price inflation should settle in coming months, given that recent conditions have been more subdued."

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