Interest rates go up to 5.5%

10 May 2007

Many homeowners are going to face higher mortgage repayments, after the Bank of England decided to raise interest rates to 5.5%.  The increase of a quarter of a percentage point – which is the first since February – means that the cost of borrowing is now at its highest level for six years.

Economists had widely predicted the hike, because the Bank is struggling to rein in inflation and consumer spending.  Inflation is currently running at just over 3%, which is well above the Government’s target of 2%.

While this rise in interest rates will be good news for savers, it will mean higher mortgage bills for many homeowners.  It will add an extra £16 a month, on average, to a £100,000 mortgage.

So can we expect yet more interest rate rises in the coming months? Well, analysts can’t agree on which course the Bank of England will take.  Some predict that interest rates will go up to 5.75% in the near future, but others believe the latest increase is enough for now.

Economist Peter Spencer said he was confident that inflation would fall backwards towards the 2% target, as big cuts in gas and electricity prices were coming through.  He said that would give the Bank some “breathing space”.

However, he warned that consumers would need to do some “belt-tightening” in order to avoid more rises in interest rates.