MPC warn that another rate increase is possible

Posted: 10 Aug 2006 11:05:02 GMT

After the Bank of England's decision earlier this month to raise the interest rate from 4.5 per cent to 4.75 per cent many analysts expressed their surprise.

However in its quarterly report on inflation the bank's Monetary Policy Committee (MPC) stated that studying the inflation patterns showed that a rate rise was necessary. The report also made it clear that the committee expects inflation to rise again slightly before heading back down towards its two per cent target.

The consumer price index (CPI) has risen steadily and currently inflation stands at 2.5 per cent. Rising energy and import prices have contributed to the higher level of inflation but the economic outlook for Britain remains good with a far greater rate of stability expected in the latter part of the year.

Mervyn King, governor of the Bank of England, stated: "The central view as described in the Inflation Report is of inflation rising further in the near term before falling back down. Although pay pressures are likely to be constrained by a degree of slack in the labour market, profit margins and pay growth are likely to recover as energy price inflation moderates.

"The main risks to the inflation outlook in the medium term are the degree of spare capacity in the economy and the extent to which profit margins and pay growth will recover as energy price inflation subsides. We have very clearly set out our approach. I think that people who think you should drop hints are barking up the wrong tree. We don't agree with that. The idea that it came as surprise is somehow a little odd."

The MPC has shown with August's rate rise that if it sees the need to raise interest rates to pin back inflation it will do so. For homeowners on a variable rate mortgage or first-time buyers looking to get on the property ladder; interest rate instability can be unsettling and bad news for re-payment projections.

However the housing market on the whole was commented on by the MPC as being robust and it continues to demonstrate growth with the average price index rising earlier this week.


© Houseladder Ltd