KEY POINTS:
Interest rates in the UK should have to rise only one more time this year for the Bank of England to hit its inflation targets, its quarterly Inflation Report indicated today.
Homeowners are preparing for more pain after policymakers yesterday signalled that interest rates will reach 6 per
cent this year, the highest level since January 2001.
Rising energy and food costs, made worse by the exceptionally bad weather causing flood damage to crops, has meant that inflation has exceeded the Bank of England's target for 14 months.
Furthermore, up to 2 million people are expected to come off their fixed-rate mortgages in the next few months and many will struggle to afford higher rates after the Bank's Monetary Policy Committee raised interest rates five times over the past year.
MPs warned yesterday the situation for families who have borrowed heavily was becoming "increasingly grim".
The Liberal Democrat Treasury spokesman, Vince Cable, said: "It is difficult to foresee anything other than a continuing rise in the number of people facing repossession and personal bankruptcy."
However, the Bank said people coming to the end of their fixed-rate mortgages should be able to cope with higher rates when they renew their deals, adding that the impact on disposable income would be limited.
In its Inflation Report, the Bank said the average interest rate on a fixed-rate mortgage was only 0.75 per cent higher than at the lowest point for the deals in 2005.
The report forecast that inflation would return to the Government's 2 per cent target within two years if rates rose a further quarter point.
However, economists believe the Bank will not be in an immediate hurry to raise rates due to uncertainties surrounding the economy amid heightened volatility in financial markets after the floods in June and July.
The majority of experts are predicting an increase towards the end of the year.
Howard Archer, at Global Insight, said the report indicated that "interest rates are more likely than not to rise to 6 per cent in the autumn".
But he added that the Bank would not be in a rush to raise interest rates again "given the current major uncertainties surrounding both the inflation and growth outlooks".
"These uncertainties are being compounded by global equity market turmoil and widening credit spreads, although for now at least the Bank of England seems reasonably relaxed about these," he added.
Business leaders cautioned over soaring rates.
Richard Lambert, the director-general of the CBI, said: "Pay pressures are subdued and there are signs that the impact of the five rate rises since last summer is beginning to take its toll on the economy, and the full effects are clearly yet to be felt."
Meanwhile, Warren Bright, the chief executive of the internet home search site Propertyfinder, said: "Consumer spending is waning, house price growth is slowing, and transaction levels have moderated, and yet we still have not felt the full impact of the five rate hikes to date".
The consumer price index (CPI), the official measure of inflation reached 3.1 per in March, which was its highest level in a decade.
It has been falling since then, due to lower energy bills.
- INDEPENDENT