09 November 2006

Households face higher mortgage repayments after the Bank of England today lifted interest rates to 5 per cent - the highest level in five years.

The move by the Bank's Monetary Policy Committee (MPC) had been widely expected as policymakers look to keep a lid on inflationary pressures.

The quarter of a percentage point increase was as good as sealed by the Halifax after it reported a 1.7 per cent rise in October house prices earlier today.

Interest rates are now at their highest point since August 2001 and come amid evidence that more households are folding under the strain of higher overheads, such as council tax bills and energy prices.

A record 27,644 people became insolvent during the summer, fuelling forecasts that more than 100,000 people could go bankrupt or take out individual voluntary arrangements (IVA) in the year as a whole.

Today's decision is likely to cost homeowners with an £80,000 mortgage an extra £13 a month if lenders decide to pass the full cost on to borrowers.

Economists have suggested rates could rise again in February if inflation - currently at 2.4 per cent - continues to exceed its 2 per cent target and the economy is left with little spare capacity.

Vicky Redwood, UK economist at Capital Economics, said: "This move was widely expected, but the key question is whether we see another rise early next year.

"Either way, with interest rates 50 basis points higher than six months ago, it could be a contributing factor to deterring people from entering the housing market over the next few months."

Ray Boulger, senior technical manager at mortgage broker John Charcol, said: "This move was expected. The key question now is whether this is the top or will we see a further increase in three months time. Homeowners need to watch out for lenders who raise their rates by more than 0.25 per cent.

"In terms of the impact on the housing market, this rise coupled with the last rise will reduce the rate of increase in house prices, but will not put them into reverse."

The MPC is jittery about inflation as it has lingered above its 2 per cent target for five months, despite September's rate dropping from 2.5 per cent to 2.4 per cent on the back of cheaper petrol prices.

CBI chief economic adviser Ian McCafferty said forecasts from the business lobby group suggested that a further increase should not be needed.

He added: "Consumer appetite for debt is falling rapidly, the economy is showing some signs of a modest slowdown, and the benefits of recent falls in oil prices will help keep inflation under control into the medium term."

Today's rise even won support from the Royal Institution of Chartered Surveyors, the industry body for property professionals. It said action was needed to dampen the housing market and prevent economic volatility.

The rate rise is not expected to be enough to derail the UK's property market.

Yolande Barnes, director of research at Savills, said: "Unlike many commentators, we do not expect that a quarter of a percentage point rise would have a significant effect on the housing market. We think interest rates would have to rise to around 6.5 per cent before the house price growth would start to slow."

In a statement accompanying the decision, the Bank said that inflation was likely to rise further above its 2 per cent target in the near term, but then fall back as energy and import price inflation cools.

It said: "Although unemployment has continued to edge up, the margin of spare capacity within businesses appears limited. Oil prices have dropped back, but there are signs that other pricing pressures have picked up.

"Against that background, the committee judged that an increase in bank rate of 0.25 percentage points to 5 per cent was necessary to bring CPI inflation back to the target in the medium term."

The Independent