Interest Rates Look Set To Rise Further

Bank of England Governor Mervin King has indicated that an alarming number of economic conditions- including continuing growth in house price inflation – remained ‘elevated’

He has indicated that the bank maybe forced to raise interest rates from 5.5% to 5.75% or higher to dampen the house price boom.

Mr King has also issued a debt and borrowing warning, suggesting that families and first-time buyers needed to be far more cautious at a time of rising interest rates.

The Bank of England will announce its next decision about interest rates on July 5^th. Mr King went on to say ‘If these economic indicators remain elevated, the MPC may need to take further action. Mr King’s remarks will be grim news for families whose budgets are already stretched to the limit by the highest borrowing costs since 2001.

Another increase would push the share of income absorbed by interest payments to its highest level since 1992, when the country was struggling with recessions.

But with the economy continuing to heat up, the bank might be forced to raise rates yet again. Many traders in financial markets now expect interest rates to reach 6%.

Mr King said the bank has a number of concerns about the economy. Factories and high street retailers have been aggressively increasing the prices they charge their customers, which could further exacerbate inflation.

Despite recent interest rate increases and signs of a slow down, the housing market is proving to be surprisingly resilient.

Yesterday, the Department of Communities and Local Government said the price of a typical home rose 11.3% in the year to April.

In the UK, expectations in further movements in inflation have also ‘drifted up’. That is a concern said Mr King, because it may lead people to demand higher wages.

Most economists expect lower gas and electricity bills to pull down inflation in the coming months. But this is of little comfort, Mr King said, because there is ‘underlying upward pressure on inflation’

He added: ‘There is no simple or self-evident answer to the question of what path interest rates will be necessary to bring inflation back to the 2% target and keep it there.

The Royal Institute of Chartered Surveyors has warned that an increase in the base rate to 6% could have a profound impact of the housing market.

Senior RICS economist David Stubbs said, ‘If interest rates were to rise to 6% before the end of the year, a sharper slowdown and a difficult 2008 would be on the cards.’