Interest rates will hit 5%, warns Bank of England

Published ¤ 23/12/2010 12:53:53

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Families should brace themselves for a huge increase in interest rates to 'normalised' levels of around 5 per cent, a senior Bank of England official warned last night.

Paul Fisher, the executive director of markets and a member of the rate-setting Monetary Policy Committee (MPC), said the Bank is looking to increase rates tenfold from their current low of 0.5 per cent.

If this were to happen, families would be spending more of their disposable income on debt interest than they have in 20 years.
Mr Fisher said the increase was likely to happen as soon as possible, meaning families could be hit by a sharp jump in mortgage costs early next year if the Bank bumps up the base rate to put a lid on rapidly rising prices.
There were also renewed concerns about the strength of the economic recovery after revised official figures showed Britain's bounce out of recession was not as strong as first thought.
The economy grew by 0.7 per cent in July, August and September rather than the 0.8 per cent initially reported, the Office for National Statistics said, while growth in the first six months of the year was also slightly downgraded.
Meanwhile, mortgage lending rose at its slowest rate for more than a decade during November as the number of loans approved for house purchase also slumped to a 20-month low, figures showed.
Net lending, which strips out redemptions and repayments, was just £1.46 billion during the month, half the level seen in November last year and the lowest figure since August 1999, according to the British Bankers' Association.

The subdued lending market also showed little sign of picking up in the near future, with the number of mortgages approved for house purchase dropping to a 20-month low of 29,991.

Minutes from the Bank's latest monthly meeting showed 'most' of the nine-strong MPC are now worried about inflation.
Deep cuts to public spending and the VAT rise from 17.5 per cent to 20 per cent on January 4 will put pressure on family finances in the New Year.

But it is the threat of higher interest rates at a time when prices of everyday goods are soaring that will cause the most alarm.
Mr Fisher's comments follow a warning this week from the CBI business lobby group, which said interest rates would increase to 1.25 per cent next year and to 2.75 per cent by the end of 2012.

That would add £202 a month, or £2,424 a year, to the cost of the average £150,000 mortgage.
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