The Bank of England, took the unusual step of saying that interest rates were highly unlikely to rise above 6%. They believe there is still inflationary pressure in the economy. For example, in recent weeks the latest economic data has shown:
- Strengthening manufacturing sector, output has been increasing more than expected
- House Prices still Rising. Report by Halifax has actually shown house price inflation rising in recent months.
- Increasing cost of oil, petrol, and other energy sources.
6% would be the highest level since January, 2001
However, others dispute whether interest rates really need to rise.
- Volatility in economy following floods and stock market falls.
- Increasing number of people on fixed rate mortgages having to renegotiate a new fixed rate contract, significantly higher than 2 years ago. After a delayed effect of 2 years, they will finally face the impact of rising interest rates and have to reduce spending as a result.
- Subdued pay claims. This is an important determinant of underlying inflation.
- Rising energy costs are likely to be quite volatile, they don’t affect the underlying inflation rate.
The Bank admits that for those consumers who have borrowed heavily, rising interest rates are likely to mean financial hardship and an increased number of bankruptcy’s
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