Shock rise in UK interest rates sparks fear
Pastor Dale Morgan
Shock rise in UK interest rates sparks fear*
By Edmund Conway, Rosie Murray-West and George Jones
Last Updated: 8:07am GMT 12/01/2007
Home repossessions are expected to soar after the Bank of England took
the shock decision yesterday to raise interest rates by a quarter of a
point to 5.25 per cent.
Bank of England sign
Indebted households could be hit again as the Bank is expected to lift
rates at least once more this year
In a new year blow for mortgage payers, the Monetary Policy Committee
lifted the cost of borrowing to the highest rate for almost six years.
Experts warned that the decision could cause a huge jump in
repossessions and insolvencies and said the Bank could have further
increases up its sleeve. Some economists think rates could top six per
cent by next year.
Yesterday's increase will add £16 to the monthly bill of households with
a £100,000 mortgage if lenders pass the full increase on to their
customers. When added to interest rate rises in August and November,
mortgage repayments for the typical homeowner will have increased by
£47.60 to £722.80.
Citizens Advice warned last night that the rise could bring financial
disaster to some people. Home repossession rates are already going up
and the charity said the unexpected increase could push people past what
they could afford. Peter Tutton, its policy officer, said: "We are
already seeing a rapidly growing number of people falling behind with
mortgage payments and in some cases threatened with repossession, and we
know some are taking on mortgages that stretch them to the absolute limit.
Mortgage rate changes chart
"Any increase in mortgage interest rates could spell disaster for people
whose finances are balanced on the very edge of affordability."
Stephen Rose, the director of Debt Advice Bureau, said it could be the
"straw that breaks the camel's back" for some borrowers, especially
families who have seen household budgets stretched by increased utility
bills and Christmas spending.
More than 1,000 workers were told they would be laid off yesterday as
the unions dubbed the day "Black Thursday".
The Birds Eye frozen food factory, in Hull, is to close with the loss of
almost 500 jobs and the cash machine producer NCR added to the gloom by
axing 650 jobs at its plant in Dundee.
Derek Simpson, the general secretary of Amicus, said it was a "black
day" for manufacturing made worse by the rise in interest rates.
The MPC decision, which will be reflected in banks' loan rates in the
coming days, will be welcome news for savers, since it could push up the
return from their bank accounts and investments.
The move shocked economists, who had been united in expecting the Bank
to leave rates on hold this month. It caused the pound to rocket in
value and sent a shudder through the stock markets.
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City veterans said it was the biggest surprise move from the Bank since
it was granted independence to set monetary policy a decade ago.
The decision was heavily influenced by an unexpectedly sharp increase in
inflation over recent months. Households have been hit by record
increases in utility bills and sharp rises in the cost of high street goods.
Mervyn King, the Bank's governor, has frequently expressed concern that
this could lead workers to demand higher salaries, potentially sparking
spiralling inflation.
In a short statement yesterday, the Bank said it believed increasing
interest rates "was necessary to bring CPI [Consumer Price Index]
inflation back to the target in the medium term". It expected inflation
to rise further in the near term but to fall back as energy and import
price inflation abate.
Indebted households could face more difficulties, with the Bank expected
to lift rates at least once more this year.
Prof David Smith, of Derby University, has forecast that the MPC will
have to raise borrowing costs to as much as 6.25 per cent by next year
in order to bring inflation and borrowing levels under control.
Andrew McLaughlin, the chief economist at the Royal Bank of Scotland,
said: "This decision was shaping up to be a non-event. Instead, it will
go down as one of the biggest shocks in the history of the MPC. It
rarely seeks to surprise the markets so this is a clear shot across the
bows.
"The decision serves to underline just how anxious the MPC is about
inflation."
Many experts suspect the decision could also stem the continued rise in
house prices but put first-time buyers off entering the market.
Businesses rounded furiously on the Bank.
David Kern, the economic adviser to the British Chambers of Commerce,
said: "We accept that inflationary pressures have edged up. But we
believe that the clear risks that growth may slow sharply in both the US
and the Eurozone should have been taken more fully into account by the
MPC, before tightening policy."