Interest rates set to rise

09-11-2006

Interest rates set to rise
The Bank of England is expected to announce a further rise in interest rates today.

Economists have widely predicted that the Bank's monetary policy committee (MPC) will increase rates to five per cent, after previously raising them to 4.75 per cent in August.

Analysts believe that policy makers will opt for a further quarter per cent hike, which will take the base rate of interest to its highest level in five years, amid concerns that inflation remains above the government's target of two per cent.

Despite a drop in September, inflation is currently running at 2.4 per cent, having been fuelled by rising household utility bills and petrol prices and MPC members are reportedly concerned that it could rise even further as a result of higher wage demands in the forthcoming pay round.

Bank of England governor Mervyn King told a parliamentary committee last month that a rise in interest rates was "not a done deal" and that "plenty of uncertainties" remained over inflation, in comments made after minutes from the MPC's last meeting showed that two members had voted for an increase in the cost of borrowing.

Nonetheless, amid signs that economic growth has continued and house prices have held up, economists say that it is almost certain that the MPC will announce a rates rise when it reveals its decision at 12:00 GMT today.

Fears that an interest rates rise could result in a slowdown in consumer spending have also been quelled by recent surveys, with the latest analysis by building society Nationwide showing that consumer confidence bounced back in October, with its consumer confidence index rising 98 points last month, up nine points from September and following a disastrous rating in August of 83.

Some analysts claim that the question is not whether the MPC will opt to raise interest rates today, but whether they will implement further rises due to inflation concerns in the future, a move which would hit homeowners and borrowers.

"A 0.25 per cent hike in official rates to five per cent looks virtually unstoppable today," said Philip Shaw, a spokesman for Investec Securities.

"The real debate is where rates head beyond November," he added.


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