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Interest rates could rise again

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14/02/2007

The Bank of England could well increase interest rates again this year, pushing up the cost of borrowing for mortgage customers.

Another rise is predicted despite the latest quarterly inflation report, which showed the level of inflation has dsipped sharply in the last month, and is expected to dip below its target level of 2% later in the year.

The bank has forecast that inflation would exceed 2% if interest rates don’t go above 5.25%.

“Consumer spending has accelerated over the past year anbd business investment has picked up sharply,” said Mervyn King, the governor of the Bank of England.

“Some of the doiwnside risks seem to have diminished, and asset prices and money and credit growth remain buoyant.”

The Bank has increased interest rates three times since Augist 2006, including one rate rise of 0.25% in January that was completely unexpected. The cost of a typical £100,000 mortgage has increased by almost £50 a month in that time.

Inflation fell dramatically from 3% in December to 2.70% in January, mainle as a result of reducing fuel and transport costs.

But the governor said the outlook for inflation remained unclear:
“Inflation at 2.7% does not mean we can ignore concenrs about inflation ahead,” he said.

King added that he hoped house price inflation would slow down this year from last years’ increase of 10%. A colling off would have the essect of bringing down general inflation, which is his remit.

“I would certainly expect that the 75 basis points imncrease in interest rates (since August) would have some effect on the housing market. Any softening would be welcome,” he said.

Most analysts expect the Bank to keep rate on hold for the next month or even two. A further increase could happen in May.

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