Shock rise in interest rate sparks fear
By Edmund Conway, Rosie Murray-West and George Jones
Last Updated: 2:41am GMT 12/01/2007
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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.
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.
"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." |
