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Interest rates to be set this week

  • 8 February 2011

This Thursday could be the day when interest rates finally start to rise; the Bank of England's Monetary Policy Committee (MPC) will announce its monthly decision at 12pm on Thursday and some experts predict we will see rates increased from the record low of 0.5%.

According to Thisismoney, money markets are signalling a quarter-point rise in the base rate by May with some experts predicting the move could come as early as this week.

All talk of more quantitative easing, the QE2 option, has evaporated. The evidence so far is consistent with the economy growing at a respectable 0.4% in the first quarter."

One member of the MPC, Andrew Sentance, has been voting for a rate rise for several months already. Last month he was joined by a second member of the committee in calling for an increase.

The nine-strong MPC has the tricky task of balancing its objective of bringing inflation from its current level of 3.7% to its target of 2%, with the potentially disastrous impact of rate rises on overstretched borrowers on variable rate mortgages. Each month MPC members vote on whether the base rate should go up, down or stay the same.

Experts have issued various interest rate predictions ever since the base rate hit the all-time low of 0.5% in March 2009. But back then no one would have predicted that the rate would remain so low for almost two years which goes to show what a hard call it is to make.

Melanie Bien of mortgage broker Private Finance, reckons it will still be several months before rates start to go up.

"Although inflation looks set to breach the 5% barrier, way above the 2% target, the fourth-quarter GDP figures showed that the economy is in a fragile state. The effects of cutting the public deficit haven't even started to be felt and unemployment is expected to rise significantly. With families already struggling with rising food, fuel and energy costs, raising interest rates as well could be catastrophic for those on the bread line," she says, "The last thing the government wants is an increase in repossessions – a likely outcome if rates rise. Rates are likely to stay put for now, rising in the second half of the year, and then slowly. We predict rates to hit 1% by the end of this year and 2% by the end of 2012."

Elsewhere, the Council of Mortgage Lenders says that it is "quite possible" that rates will stay at 0.5% for the rest of 2011. Meanwhile Simon Ward, chief economist at the investment group Henderson, suggests there could be a quarter-point rise as early as next month.

According to research by unbiased.co.uk, nearly 50% of borrowers have not reviewed their mortgages since the base rate dropped to its record low. The website warns many borrowers have been lulled into a false sense of security by their lower monthly costs. For those that would struggle to pay their mortgage if rates increase, The Times published a useful article this weekend explaining how to survive an interest rate rise.

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