The Bank of England MPC meets tomorrow leading to increasing fears that interest rates will rise in a bid to combat inflation.
At the previous meeting, two members voted for an increase from 0.5% to 0.75% to the base rate. Since March 2009, the official cost of borrowing has been at a 315 year low.
Some experts believe that an interest rate rise will have a calamitous effect on the housing market, house prices and consumer confidence.
According to the CML, a 0.25% interest rate rise would mean the average UK contractor mortgage holder would need to pay an additional £40 per month. Whilst this might not sound like much, it would be the first of many increases until rates returned to normal levels. A rise in interest rates would also be a blow to the many households struggling to balance their finances.
The Institute for Fiscal Studies said recently that the average British family will be around £500 worse off due to the Government’s attempts to reduce borrowing.
Mervyn King, the governor of the Bank of England, has also warned that CPI inflation will reach between 4% and 5% before returning to the target rate of 2% at some point next year.
It will be interesting to see how quickly mortgage lending companies pass on any interest rate rises to their customers. The majority of mortgage deals do not reflect the low base rate whilst savers have been getting virtually nothing on their investments. Based on this evidence, the financial institutions will probably up the lending rate very quickly and leaving savings rates as they are.
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