Inflation hike threat to homeowners

Published on Tuesday 19 January 2010 21:46

FAMILIES face the prospect of rocketing monthly mortgage bills over the coming months after a record increase in inflation was confirmed yesterday.

Analysts warned the sudden rise would put intense pressure on the Bank of England to push the cost of borrowing higher, thereby ending the interest rate "holiday" for thousands of households and businesses.

By the end of the year, the interest rate could be up to 1.75 per cent with the first increases imposed as early as May, post-election, experts said. City traders yesterday piled on bets that interest rates, still at the record low level of 0.5 per cent, would rise before 2011.

The claims prompted warnings that a sudden rate hike could provoke a "double-dip" recession by reducing consumer confidence, cutting off investment and fuelling unemployment,

The increase in inflation, revealed by the Office of National Statistics, had been expected but the scale shocked the City. In December, it increased by 0.6 per cent on the previous month – a new record – converting to an annual increase of 2.9 per cent. It is the first time since May that inflation has broken the Bank of England's 2 per cent target.

It was blamed largely on artificially low prices this time last year, following the cut in VAT, and the high price of fuel. Another increase is expected next month as the impact of the end of the VAT holiday is felt.

Reflecting on the figures, Nick Kounis, chief European economist at Fortis Bank Nederland, and a former Treasury official, said: "It's an early sign headline inflation is likely to accelerate even more sharply than the Bank expects. It will be the first central bank to hike interest rates, and we expect it to do so in May."

Nigel Lewis, property expert at FindaProperty.com, said: "Homeowners across the UK will be hoping this inflationary blip settles down again soon, because if not the chances of a base lending rate hike later this year will increase."

However, other experts said they were sceptical an increase in the interest rate will be necessary any time soon. They point out the weakness of the recovery and cuts to public sector budgets expected after the election, both of which could dampen inflation.

Experts at Standard Life in Edinburgh also argued the figures were not the start of an upward trend and that the Bank would not be forced into immediate action.

Lenders and property firms said that it would be deeply damaging if the Bank did decide to increase interest rates too soon, warning it could snuff out any recovery in the housing market.

Jonathan Loynes, chief European economist at Capital Economics, said the higher-than-expected figures should not throw Bank rate-setters into "a blind panic" – although he added that "nerves will be sorely tested over the next few months".

Gordon Brown attempted to play down the increase, saying it had been expected. "I don't think we should read too much into one month's figures," he said.

Liberal Democrat Treasury spokesman Vince Cable added: "These figures are almost certainly a temporary spike. With inflation expected to fall quickly, it seems unlikely that the Bank would want to raise interest rates in the near future."

Grahame Smith, Scottish Trades Union Congress (STUC) general secretary, said: "It is essential the monetary policy committee resists calls to consider a rise in interest rates. Increasing the cost of borrowing while unemployment is high, investment low and confidence weak is a recipe of disaster. We need to avoid a double-dip, not provoke one".

Analysis:

Bill Jamieson: Surge in inflation to 3% leaves Labour with triple strength headache