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Inflation prompted rate hike

Rocketing inflation has been blamed for the Bank of England’s shock move last week to increase interest rates by 0.25% to 5.25%.

With industry experts across the board predicting a rate hold, the move has prompted fears that inflation has smashed through the 3% inflation marker.

Last week it was reported in Mortgage Strategy that Moneyfacts.co.uk was predicting that the 14% growth in broad money could prompt the BoE’s Monetary Policy Committee to raise rates in a bid to combat inflation.

The present official rate of inflation, which is linked to the Consumer Price Index, is 2.7% and the next inflation rate announcement is due on Tuesday this week.

Trevor Williams, economist at Lloyds TSB, says the rise is a warning from the BoE that it is serious about keeping inflation low.

And Michael Coogan, directorgeneral of the Council of Mortgage Lenders, says: “Inflationary pressures appear to be pronounced, not least because of the prospect of higher wage growth. We would not be surprised if rates ended 2007 at 5.5% rather than the 5.25% we forecast in December.”

The result of all this for many borrowers – particularly those on tracker products – could be a tough couple of months ahead, especially for those whose finances are already stretched.

Jonathan Cornell, technical director at Hamptons Mortgages, says: “While each of the three base rate increases we have seen since August last year has brought a relatively small increase in the cost of mortgages, the combined effect will undoubtedly start to hurt home owners not on fixes.”

Philip Davies, chief executive of Linden Homes, says: “The BoE’s decision to raise interest rates again is likely to price many of the remaining first-time buyers out of the market.

“This will result in stagnation and prevent existing home owners from moving up the ladder.”

Bambos Hambi, co-head of fund manager Gartmore, says: “This move has the potential to spook the housing market which has so far remained fairly buoyant in the face of rising interest rates.”

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