UK house prices continued to recede in 2008 after the cost of a home fell for the third consecutive month in January by 0.1 per cent, raising the likelihood of an interest rate cut next Thursday.

Figures from Nationwide show that while the decline in house prices was more modest in January, compared to declines of 0.4 per cent in December and 0.9 per cent in November, the trend is in marked contrast to October when prices rose by 1.6 per cent.

The annual rate of house price inflation stood at 4.2 per cent for the 12 months to January, compared with the same period last year, with the average price of a typical property at £180,473, an increase of £7,249 over the last 12 months. However, inflation is slowing from the 4.8 per cent rise recorded in December.

Yesterday, the Bank of England published data showing that the number of mortgage approvals fell to 73,000 in December, down from expectations of 79,000, and below the rate of new home loans granted in November, which reached 81,000.

The Bank of England will announce whether it will cut interest rates next week, on February 6, after deciding to hold borrowing costs at 5.5 per cent at the Bank's Monetary Policy Committee's meeting in January. In December, the rate-setting committee voted to reduce the UK interest rate from 5.75 per cent by a quarter point.

Last night, the US Federal Reserve made its second cut to interest rates in just over a week, taking the cost of borrowing in America down by half a point to 3 per cent.

Last Tuesday, the Fed stunned investors when it cut the rate by three quarters of a percentage point, in an attempt to calm severe nervousness throughout the world's financial centres about an impending US recession.

Economists widely expect the Bank of England to make a cut next week, but it will be more staid than its US counterpart due to concerns about rising inflation.

Howard Archer, the chief UK & European Economist at Global Insight, said: "Inflationary concerns are likely to limit the pace of Bank of England interest rate cuts, so no more than a 25 basis point cut to 5.25 per cent seems likely next Thursday."

Commenting on today's data, Mr Archer said: "On the one hand, house buyers are being pressurized by elevated house prices, modest real disposable income growth and the significant overall rise in mortgage rates since August 2006.

"On the other hand, the credit crunch and sub-prime mortgage concerns mean that lenders have become much more careful about whom they lend to, and on what terms. Furthermore, the credit squeeze has made it difficult for a significant number of mortgage lenders to get hold of adequate funds to finance new mortgage business."

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