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As inflation rises Mortgage qualms
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Tuesday, 12 September 2006

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Homeowners are gearing up for another hike in mortgage rates after inflation rose to its joint highest level since Labour came to power nine years ago.  The inflation hike was caused by increases in the price of games and toys, including a big upward contribution from computer games.

The Consumer Prices Index (CPI) rate of inflation hit 2.5% in August compared with a rate of 2.4% in July, increasing the chances of another rise in interest rates.

It was the fourth successive month inflation stayed above the Bank of England's 2% target and only the third time it has hit 2.5% since 1997.

Rising energy bills did not help, but it could have risen even further had it not been for a sharp downward pressure from dipping petrol prices.

The news spells trouble for householders struggling to pay off mortgages, loans and credit card bills, with analysts now predicting interest rates to hit 5% by November.

Tom Levinson, an economist at ING Bank, said: "This report is sure to be taken as a hawkish signal on the outlook for UK interest rates. We expect the Bank to tighten policy once again to 5%, most probably in November, when it releases its next quarterly bulletin."

The Bank's Monetary Policy Committee (MPC) sets interests rates every month to prevent inflation spiralling above the 2% mark and raised the cost of borrowing to 4.75% in August.

Bank Governor Mervyn King has warned there is a 50-50 chance that inflation will strike 3% over the next six months and a good chance it will lift above 3% over the next two years.

This would force Mr King to write an explanatory letter to the Government for the first time since the Bank was given control of interest rates in 1997.

 

Edwina Baniqued

 
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