Interest rates to rise again?
Updated on 12 June 2007
The Bank of England governor warns that the cost of borrowing will increase if rising prices continue.
Governor Mervyn King's warning is the strongest indication yet that more interest rate hikes are on the way.
Although the official level of inflation fell this morning, Mr King observed that the situation for some homeowners looks bleak, with mortgages now at their least affordable level for 15 years.
The bank chief told the Welsh CBI there was a list of worrying inflationary pressures which remained "elevated" and may lead to action by the Bank's Monetary Policy Committee.
"If these indicators remain elevated, the MPC may need to take further action," he said.
'It is unwise to borrow so much that the repayments are affordable only if interest rates remain at their initial levels.'Mervyn King
With it becoming ever easier for householders to borrow from banks, Mr King also warned householders about variable rate borrowing.
He said: "Obvious though the point may seem, it is unwise to borrow so much that the repayments are affordable only if interest rates remain at their initial levels."
Without a slowing in household and companies spending and property prices, as well as a drop in inflation, the market anticipates interest rates may hit 6 per cent by the end of the year.
Households were spared a back-to-back rise in interest rates last week after the Bank of England voted to keep borrowing costs on hold.
The decision, which left the Bank's base rate at 5.5 per cent, had been widely expected, although economists have warned another rise may happen next month.
'If these indicators remain elevated, the MPC may need to take further action.'Mervyn King
Families with a typical £100,000 home loan have seen their monthly repayments increase by £63.79 after four interest rate hikes since last August.
The Bank's Monetary Policy Committee (MPC) sanctioned the increases as part of its battle to curb inflation in the face of a strong global economy, higher energy prices, rising house prices and buoyant consumer spending.
The CPI measure of inflation breached its target range to reach 3.1 per cent in March, although it retreated to 2.8 per cent in April.
The Bank indicated last month that it may need another hike in order to keep the consumer prices measure of inflation on track for 2 per cent.
There have been signs that the rate hikes are beginning to slow consumer spending and the housing market.
Mortgage approvals fell to their lowest level in 12 months during April, while figures from the British Retail Consortium showed a fall in like-for-like sales in May as shoppers were put off by wet weather and previous rate rises.
