Interest rates rise to 4.75%
THE Bank of England raised the base rate from 4.5% to 4.75% this afternoon and immediately economists warned that the next rise has already been pencilled in.
Today's rise was widely expected as the Bank's monetary policy committee (MPC) continued to press down on house prices and consumer spending that have combined to force personal debt above the £1 trillion mark .
The increase is likely to push up the cost of the average monthly mortgage repayment by around £16.
A borrower who owes £100,000 on a 25-year repayment home loan at a typical rate of 6.25% will find their monthly bill increase from £667 to £683. It adds up to an extra £187 a year.
Abbey, the UK's second largest mortgage lender, was the first to react by passing on the full rise. The move will take its standard variable rate to 6.75% from the beginning of September.
But there could be more bad news to come for homebuyers. The majority view of a group of 32 economists polled by the Reuters news agency was that rates would rise to 5% in November. Seven said rates would next rise again in September and six said in October.
In a statement timed to coincide with today's rate rise, the Bank of England said: 'With demand already high relative to the supply capacity of the economy, continued strong growth is likely to lead to inflationary pressures.'
It noted that business surveys pointed to continued expansion and that the housing market was still buoyant, though there were now signs that it may be starting to ease. Consumer spending may also be moderating, said the Bank.
Richard Iley at BNP Paribas in London said: 'This is BoE code they believe the rate medicine is beginning to work and the soft landing they want to achieve in the housing market and consumption is starting to happen. It's highly significant they chose this statement to highlight that.'
The Bank of England started raising rates from a 48-year low of 3.5 percent last November, becoming the first major central bank to start tightening.
Trevor Williams, chief economist at Lloyds TSB Financial Markets, said: 'Though house inflation is not the MPC's target and so was not the principal reason for higher rates, continued fast increases in property prices are sending an important message about the bias of risks to consumer price inflation.
'Rising oil prices and the continued threat of international political instability have added to global uncertainty but the MPC is evidently keen to vanquish the spectre of inflationary pressure, despite the rise in borrowing domestically by consumers.'
Simon Rubinsohn , chief economist at stockbroker Gerrard said: 'We think the MPC will opt for two further quarter-point rate hikes before year-end and suspect that interest rates may peak at a higher level than the 5.5% currently being discounted by futures markets in 2005.'
But Steven Andrew, ISIS Asset Management chief economist, said today's rise marked the peak of the rate cycle. 'From here we expect to see rates stay flat for the rest of 2004.'
Inflation, as measured by the Consumer Prices Index (CPI), is currently 1.6%, which is below the Bank's target of 2%.
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