Base rate rise threatened as inflation hits 3.3%

by Gill Montia

Story link: Base rate rise threatened as inflation hits 3.3%

The news that inflation rose to 3.3% in May has raised fears that the Bank of England will be forced to increase the base rate above its current level of 5%.

The figure for inflation, which is based on the Consumer Prices Index, is at its highest since 1997 and the 0.3% rise on April was above analysts’ expectations of 0.2%.

The cost of living in the UK has been hit by higher fuel, energy and food prices, taking inflation well above the Government’s target of 2% and putting pressure on policymakers to raise interest rates to slow the incline.

However, a higher base rate would impact on the already difficult UK mortgage market and increase the chances of a property market crash.

Tumbling house prices have serious consequences for the economy, which is already showing evidence of a slowdown.

Last week around 12 mortgage lenders raised interest rates and from today, Nationwide has increased rates on many of its fixed and tracker loans by up to 0.5%.

Governor of the Bank of England, Mervyn King, will now be obliged to write to the Prime Minister to explain why inflation is above the 2% target and the content of his letter could give an indication as to whether the Bank will raise the base rate in July.