Bank of England rates meeting begins

British households are braced for more mortgage pain as Bank of England policymakers began their latest two-day interest rates meeting today.

Economists are certain that the Bank’s base rate will increase from 5.25% to 5.5% when the Monetary Policy Committee’s (MPC) verdict comes through at 12 noon tomorrow. It will be the fourth quarter point rise since August.

Expectations of a rate rise firmed after the consumer prices measure of inflation hit 3.1% in March, forcing the Bank’s Governor to write a letter of explanation to Chancellor Gordon Brown for the first time.

There are fears that rates will need to rise further, although economists said it was unlikely the MPC would deliver a half point increase this week.

Howard Archer, UK economist at Global Insight, said he expected the MPC to stick to a quarter point hike tomorrow, followed by another quarter point hike to 5.75% by August.

However, he warned back-to-back hikes in May and June were a “very real possibility”, particularly if consumer price inflation comes in at 3% or above in April and there is evidence that firms are seeking to push through more price hikes.

He added: “While it still seems probable that consumer price inflation will fall back significantly over the coming months and may well be back to 2% before the end of the year, there is an increased risk that the retreat will be slower and stickier than previously anticipated.”

In the 10 years since it took on independence for setting interest rates, the Bank has moved by more than 0.25% on only four occasions and never for a hike.

If the Bank does hike by a quarter of a percentage point, it would mark the fourth such increase since August last year, leaving the rate at its highest level for six years.

Typical homeowners with a £100,000 (€147,000) mortgage will have to fork out an extra £16 (€23.50) a month on average in mortgage repayments if the base rate does increase.

They will be on average paying £63.79 (€93.85) more in their monthly mortgage bill than they were before last August’s first rise, when rates stood at 4.5%.

Despite the recent rate increases, house prices have continued to rise at a steady rate, while retail sales have remained resilient. Economic growth in the first quarter was recently estimated at 0.7%, slightly ahead of forecasts, while the FTSE 100 Index is at its highest level since September 2000.

The major concern for rate-setters will be the Consumer Prices Index, which is at 3.1% after hikes in petrol and food prices. The Bank’s target is to keep the inflation measure within 1% above or below the Government’s 2% target.

The next inflation announcement is due on May 15, followed a day later by the Bank of England’s quarterly economic report.