Experts predict August rate rise

By JONATHAN PRYNN FOR MAILONLINE
Updated: 11:18 EST, 17 July 2007

Millions of homeowners are facing further mortgage misery. Economists said today another increase in the cost of borrowing is almost certain and could come next month.

It would be the sixth since last August and take the Bank of England's base rate from its present 5.75% to 6%, the highest level since February 2001.

But the prospect of higher interest rates is good news for British tourists going to the US. The pound jumped to a 26-year high of almost $2.05 as a result.

Fears of an interest rate rise increased when figures were released today showing that prices are rising too quickly.

The hardest hit will be two million homeowners who are on fixed rate mortgages due to end in the second half of the year. They could face increases from 4.5% to 6% when they come to lock into a new fixed rate.

On a £200,000 repayment home loan, that would add around £179 a month to the mortgage payments. On top of that they will have to pay 'arrangement' fees of up to £2,000.

For a family with a £300,000 mortgage having to move to a higher fixed rate, the increase will be £270 a month.

If rates do go up next month, borrowers with a £200,000 loan still exposed to a lender's standard variable rate will have seen monthly repayments increase by £187.69 from £1,242.48 to £1,430.17 in a year.

Today's figures from the Office of National Statistics show that inflation is only very slowly responding to the interest rate 'medicine' being dispensed by the Bank. It will be alarming news for Gordon Brown's new government and raises the risk of a house price crash.

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The headline rate of inflation dropped slightly from 2.5% to 2.4%today, still well above the Government's target of 2%. More worryingly, the broader measure of the cost of living, the all items Retail Prices Index, rose slightly from 4.3% to 4.4%.

A third measure of inflation, which strips out volatile items such as food and energy, also increased - to 2% - its highest rate in a decade.

The Bank and the Government hopes that higher interest rates will dampen down economic growth and consumer spending, leading to shops having to drop their prices.

• Economists give their rates views following the inflation figures