The Bank of England has raised interest rates for the fifth time within a year, by another quarter of one percent.
Base rates are now 5.75% – their highest level since 2001. That means homeowners face an extra £16 a month on a typical £100,000 mortgage.
And – say experts – rates could go up yet again – after the Bank said it was determined to bring inflation under control.
Employers have warned that ‘relentless’ increases could harm British businesses – and there’s already been a surge of people seeking help with mortgage arrears.
Like the captain of a supertanker, the Bank of England governor Mervyn King is struggling to keep the economy on course.
Four interest rate rises in less than a year have failed to slow the economy down. Now he hopes a fifth 1/4 point rise to 5.75 per cent will stop it running away with itself.
That’s good news for savers but not borrowers, and in particular many homeowners.
Consumer confidence fell for the first time in six months during June, as people braced themselves for higher interest rates, a survey showed.
The drop wiped out half of the strong rise in confidence recorded in May, with people worrying about the economy and jobs both now and in six months’ time, Nationwide Building Society said.
Consumers’ willingness to spend money was the only index to rise during June, increasing by two points, although it still remains broadly flat for the past six months and significantly lower than it was this time last year.
The research comes as the Bank of England’s Monetary Policy Committee begins its two-day interest rate setting meeting. It is widely expected to announce a further hike in the cost of borrowing on Thursday.
The Bank of England governor warns that the cost of borrowing will increase if rising prices continue.
Governor Mervyn King’s warning is the strongest indication yet that more interest rate hikes are on the way.
Although the official level of inflation fell this morning, Mr King observed that the situation for some homeowners looks bleak, with mortgages now at their least affordable level for 15 years.
The bank chief told the Welsh CBI there was a list of worrying inflationary pressures which remained “elevated” and may lead to action by the Bank’s Monetary Policy Committee.
“If these indicators remain elevated, the MPC may need to take further action,” he said.
With it becoming ever easier for householders to borrow from banks, Mr King also warned householders about variable rate borrowing.
He said: “Obvious though the point may seem, it is unwise to borrow so much that the repayments are affordable only if interest rates remain at their initial levels.”
The Bank of England has voted to raise interest rates by a quarter of a percentage point to 5.5%.
The increase, the first since February, takes the cost of borrowing to its highest level since 2001.
Analysts had widely expected the rise as the Bank battles to rein in inflation and cool consumer spending.
Business and employers groups accepted that the latest rise was “necessary”, but added caution was needed in future so as not to slow UK growth too much.
“The MPC (Monetary Policy Committee) has to be firm. But it is important not to overreact to transitory developments,” the British Chambers of Commerce (BCC) said.
Homeowners with average mortgages will pay £1,500 a year more in repayments because of interest rate rises over the past year. With another rise expected this week, those with a £150,000 mortgage could be paying up to £125 extra a month.
The increased payments threaten further pressure on an overheated housing market as homeowners struggle to keep up with large mortgage repayments. Anyone with an average interest-only tracker mortgage of £150,000, which mirrors the base rate, will have seen repayments increase by £94 a month following three rate rises in the past year. A 0.25 per cent increase on Thursday would cost another £31, said mortgage broker John Charcol. London will be hit the hardest. Here the average loan is £210,000 and on an interest-only tracker mortgage – where the interest but not the capital is paid off – monthly payments will be up £175 on a year ago.
On top of this, more than 2 million homeowners who are coming to the end of cheap two and three-year fixed-rate deals will see repayments rise by more than £1,000 a year if they revert to their lender’s standard rate, according to online mortgage broker mform.co.uk.
Sterling strengthened against the dollar on Tuesday after an upbeat survey on retail sales fuelled expectations of more interest rate hikes.
The CBI’s latest distributive trade survey found a balance of plus 44% of retailers reporting higher sales volumes in the first half of April after strong Easter trading – the highest balance since May 2004.
The pound was trading at 2.0045 US dollars after economists predicted another hike in interest rates from the Bank of England’s Monetary Policy Committee in the autumn on top of a widely-expected quarter-point rise to 5.5% next week.
Global Insight’s chief UK economist Howard Archer said: “The robust survey not only cements a quarter-point interest rate hike to 5.5%, but increases pressure for interest rates to rise further thereafter.
“We now expect interest rates to reach 5.75% in the third quarter.”
Inflation has gone past 3%, forcing the Bank of England’s governer to write a letter of explanation to Gordon Brown.
Controlling inflation has been at the very heart of the government’s claim to economic competence.
But today for the first time in 10 years, the rate of inflation rose above Gordon Brown’s target.
The Bank of England has the job of meeting that target: the Governor’s now written the Chancellor, explaining what’s gone wrong.
In his letter, Mervyn King talks of growing price pressures within the economy, and most economists believe more interest rate hikes are imminent.