Interest rates rise to 4.75%

Posted: 04 Aug 2006 10:31:47 GMT

The Bank of England has put interest rates up 0.25 per cent from its previous rate of 4.5 per cent, sparking a glum response from mortgage holders.

Unless a householder is on a fixed rate mortgage for a certain amount of time, they will now have to pay more on their repayments.

This is the first change in 11 months and the first rate increase in two years. The Monetary Policy Committee's (MPC) decision is based on an inflation increase in June triggered by anxiety of energy prices putting costs up. Analysts had thought that the MPC would delay a rise until the inflation rate had possibly increased a little more.

The rise does seem to be following a global trend. In the US interest rates were increased with the Fed up to 5.25 per cent, the eurozone also increased to three per cent. The same pattern can be seen in Australia and even Japan that has usually seen near basement rates.

Stuart Law, managing director of Assetz, stated: "House prices are still growing and are bound to continue to do so whilst net household creation continues at such a pace compared to house building new-starts - it is just a question of supply and demand.

"It is the economy that is most at risk from this rate rise when we already acted sufficiently through 2003/04 in raising rates. Any further rise would damage consumer confidence and hamper our competitiveness."

It was obvious that the MPC decision would be a close call and so the markets suffered a jolt as a result of the rise.

Paul Niven, head of asset allocation at F&C Asset Management, stated: "The hike in interest rates came as a shock to financial markets, with futures markets previously pricing in the hike in the fourth quarter.

"Interest rate futures prices are now pricing in a further hike by the end of the year which would take rates to five per cent, and bond markets have weakened with yields rising. Equity markets weakened in the immediate aftermath of the hike, as investors grew increasingly concerned about the housing market."

As is the case with the US reserve willing to make rate changes when they see fit, the Bank of England may see positive results and recovery from the swift action they have shown. This could see the rate move back down in the next announcement.



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