Call for short, sharp rate shock

By HELEN LOVELESS, MAIL ON SUNDAY ENTERPRISE EDITOR
Updated:

 

HOMEOWNERS should be hit with a hefty half a percentage point increase in interest rates to keep inflation under control, according to a new report.

In its regular forecast for the UK economy, the National Institute of Economic and Social Research (NIESR) warned that house prices are currently overvalued by up to 30% and will need to fall sharply in order to return to their true level. Just last week investment bank Durlacher repeated its earlier predictions that house prices were set to fall by a hefty 30% to 45% in the near future.

The NIESR has criticised the 'gradual' interest rate rises over the last month, which it believes have failed to temper consumer spending and upward pressure on prices. Consumer spending is expected to increase by 2.8 in 2004, the fastest upturn in four years.

Over the past nine months the Bank of England base rate has risen four times, each time by a quarter-point, from 3.5% to 4.5%. It is widely expected to increase by 0.25% again early next month, pushing up costs for borrowers again.

Yet households have been slow to respond, with borrowing continuing to rise sharply across the board. Just this week the Bank of England confirmed UK consumer debt had broken through the £1 trillion barrier for the first time.

Figures published by lender Nationwide this week show the property market registered the fastest annual rise in 14 months in July, up 2.1% from June and 20.3% higher than a year.

The figures add weight to claims by the NIESR that, unless interest rates rise by 0.5%, inflation is likely to exceed Chancellor Gordon Brown's stated target of 2%.

A spokesman for the NIESR said: 'The rather leisurely tightening of monetary policy - every increase has been a quarter of a percentage point - will have done little to ensure that inflation is not expected to rise sharply.

'Such a change in expectations could have a major impact on the prospects for inflation. There is a strong case for the Monetary Policy Committee to influence expectations more forcibly, by putting rates up by half a percentage point to 5% when it meets in August,' he added.

However, an larger increase than normal is likely to be far less welcome to millions of homeowners, who would see monthly mortgage payments rise sharply if the Bank of England takes heed.


Useful links


Most watched Money videos