August base rate rise looms

by Gill Montia

Story link: August base rate rise looms

Leading economists are expecting the cost of borrowing to increase by a quarter of a per cent in August.

If predictions are correct, it will be the sixth rise since August 2006, and will and take the Bank of England’s base rate from 5.75% to 6%, its highest level since February 2001.

Latest figures show that prices are still rising too quickly and that further action will be needed to achieve the Government’s 2% target for inflation.

According to research from HBOS, the UK economy has enjoyed a longer period of growth than any of the other 29 members of the Organisation for Economic Cooperation and Development.

The economic boom has, to an extent, been fuelled by strong growth in house prices and in the City, where financial services activity has been expanding rapidly.

In addition, oil prices are expected to rise to $100 a barrel in the near future and this coupled with a continued upward pressure on food prices could keep inflation well above the Bank of England’s 2% target throughout 2008.

If so, there is little likelihood of a cut in the base rate this year and there is a good chance that rates will exceed 6% during 2008.

A further interest rate rise should produce a slow-down, particularly as there are already signs of a decline in the property sector and in the markets.

Among those hardest hit will be the two million homeowners who are on fixed rate mortgages due to come to the end of their terms in the second-half of this year.

They will be facing substantial increases in mortgage interest repayments when they rearrange their borrowing.