Money News

Inflation fears could force Bank to raise base rate

By Martin Fagan - news@consumerchoices.co.uk

Higher household energy bills and food costs pushing inflation up will mean higher interest rates and a blow to mortgage holders.

After two years of interest rates being at an historic low, the Bank of England latest Quarterly Inflation Report predicts inflation will hit 5% by the end of the year and that interest rates may have to rise as a result.

A rate rise to 1% would increase monthly repayments on an average £150,000 variable rate mortgage by £43 a month or £516 a year - hitting some eight million households.

On top of the rate rise warning, the Bank has painted a bleak picture of soaring inflation, rising energy bills and sluggish economic growth.

Higher food costs were also contributing to inflation's rise this year, the Bank of England said.

In another squeeze on hard-pressed Brits’ household finances, which are suffering from tax rises, record fuel prices and insignificant pay rises or even pay freezes, the Bank is expecting domestic gas bills to increase by 15% and electricity bills by 10% this year which will further fuel inflation.

“Bank rates cannot stay at this level indefinitely and at some point it will return to more normal levels,” said Mervyn King, Governor of the Bank of England.

"But that doesn't tell you, I'm afraid, when Bank rates will rise," he added.

However, an interest rate rise would come as a relief to Britain’s savers, who have lost out since rates were pushed down to 0.5% in March 2009.

But although any interest rate rise would likely hit borrowers almost immediately, savers could have to wait months for the increase to be passed on.