Bank of England raises interest rates to 5.75%

Published by webmaster for 24dash.com in Bill Payments

Homeowners faced another hike in mortgage costs today after the Bank of England raised interest rates by a further 0.25% to 5.75%.

The Bank's base rate is now at its highest level since March 2001, following five increases in less than a year.

Today's move was widely expected as inflationary pressures have remained strong and borrowers came within a whisker of a hike last month.

The Bank said in a statement that it remained concerned about hitting its 2% target for inflation.

It said: "The committee judged that, relative to the 2% target, the balance of risks to the outlook for inflation in the medium term continued to lie to the upside.

"Against that background, it further judged that an increase in Bank rate of 0.25% to 5.75% was necessary to meet the 2% target for CPI inflation in the medium term."

Today's increase is certain to be passed on by lenders, meaning borrowers will fork out an extra £16 a month on average on a typical mortgage of £100,000.

The four hikes in interest rates since last August have already added around £64 to the £100,000 home loan, fuelling concerns that more families could be tipped over the edge financially.

Citizens Advice said this week that its network of bureaux had already seen a surge in people seeking help over mortgage arrears. Some economists have warned that rates could rise again later this year, to peak at 6%.

Businesses and manufacturers will also feel the pinch from the MPC's decision.

David Kern, economic adviser at the British Chambers of Commerce, warned "relentless" rate rises could harm Britain's businesses.

He said: "We are very concerned over the long-term effects on British business of the increasingly aggressive policy stance that appears to be emerging.

"British business has shown resilience so far in the face of higher interest rates, but the pain is set to increase rapidly from now onwards."

Manufacturing organisation EEF also raised concerns over the impact on its members, saying the rise was "a step too far" and risked slowing the economy unnecessarily.

The MPC has been upping rates to keep a lid on inflation and bring it back to the Government's 2% target after a peak earlier this year that saw the Consumer Prices Index hit its highest level since the Bank took charge of setting rates 10 years ago.

But the rise in the cost of living is showing signs of slowing down, with CPI - used as the official measure of inflation - dropping back to 2.5% in May.

Recent data also suggests that the spate of rate rises is seeing consumers rein in their spending and putting pressure on firms to control pay and price increases.

Recent figures from the CBI showed that retail sales in June grew at a slower than expected rate for the second month in a row and high street stores have been reporting a drop off in trading.

Housing data from the Halifax earlier this week also signalled a marginal decline in property prices, with the 0.4% increase during June marking the second month in a row that prices had risen by less than 0.5%.

Homeowners in some parts of the country also saw falls in the value of property, notably Wales, where prices dropped by 2.8% last month.

But Malcolm Barr, economist at JP Morgan, said it was unclear if the rise to 5.75% was the last that borrowers will see this year.

"In increasing the rate in July rather than August on the back of a move in May, the MPC has stepped up the pace of moving up interest rates," he said.

"It remains to be seen if it's a one-off adjustment or reflective of an MPC that feels it has more to do.

"My suspicion is that the latter is true and as a result we are likely to see rates move up to 6% in the next few months."

The British Retail Consortium (BRC) warned the quarter-point increase could be "a rise too far" and that the MPC was wrong to regard the consumer slowdown as tentative.

BRC director general Kevin Hawkins said: "The effects of the recent, quick-fire series of rate rises are now beginning to be felt.

"It's clear there is more impact which has yet to feed through to sales and consumer confidence.

"With disposable income growth at record lows, saving slumping and customers struggling to meet rising household bills, the squeeze is tightening."

The Trades Union Congress added the decision would "prove painful for hundreds of thousands of homeowners and manufacturing companies".

TUC head of economics and social affairs Adam Lent said: "Several months of calm with no further rate rises are now a must, if UK industry is to enjoy stability and certainty for the rest of the year."

However, Global Insight economist Howard Archer cautioned that, with risks remaining to company pricing power and wage inflation, interest rates may increase further still.

He said: "If interest rates of 6% by the end of the year are to be avoided, the Bank will need to see sustained evidence over the coming months that the 125 basis points rise in interest rates enacted since August 2006 is increasingly feeding through to dampen economic activity and contain underlying inflationary pressures."

Shadow chief secretary to the Treasury Philip Hammond said: "Many families are struggling to cope with rising mortgage payments, higher taxes and falling real incomes.

"The result is that saving is the lowest for almost 50 years and personal indebtedness is soaring.

"This is Gordon Brown's true economic legacy."

Liberal Democrat spokesman Vince Cable said: "Today's interest rate rise is almost certainly not the end of rising rates, thanks to the Bank of England allowing the expansion of credit and the bubble in the housing market to get out of control.

"A painful correction would be paid for by millions of families struggling with mortgage payments.

"We are already seeing rising repossessions and insolvencies. This will only get worse as previous rate rises start to bite, especially with more than a million people coming off fixed rate mortgages in the coming months.

"We face the possibility of falling house prices and negative equity last seen in the late 1980s.

"It is long overdue for the Chancellor to sit down with mortgage lenders and discuss how they should handle a wave of arrears and repossessions since most families have no safety net in the form of benefit entitlement or insurance.

"It is vitally important that the banks show more responsibility in handling the crisis in arrears than they have shown in their lending practices."

Copyright Press Association 2007

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