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Could base rate rise in May?

Could base rate rise in May?

Category: Economy

Updated: 16/02/2011
First Published: 16/02/2011

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

The governor of the Bank of England has dropped a heavy hint that interest rates could begin to rise in May.

In the letter to the Chancellor that the Bank's boss is required to write when inflation exceeds its 2% target, Mervyn King said inflation is likely to remain above the desired level for the rest of 2011.

However, he added that it was likely that inflation would return to 2% sometime next year, based on 'the assumption the bank rate increases in line with market expectations'.

Analysts have taken this as a signal that the base rate will start to rise in May, and could be pushed even higher before the year is out.

The base rate of interest has been at its record low of 0.5% for 23 consecutive months, as the economy struggles to get back on track.

However, the main remit of the rate-setting committee at the Bank is to keep inflation under control.

In the Bank's latest Inflation Report released this morning, Mr King said he expects inflation to rise sharply in the first half of 2011 and remain high over the coming year.

He admitted that inflation will reach levels higher than the Bank had anticipated in its report three months earlier.

Mr King said the change in expectation mainly reflected further sharp increases in commodity and import prices in the past three months, taken together with the increase in VAT.

However, as long as food, energy and other commodity prices do not continue to rise at the same rate, Mr King said he then expects CPI inflation to start falling back.

Revealing the committee's expectation that inflation will start to fall in 2012, Mr King warned that the extent to which it will drop is uncertain, and that 'there are large risks in both directions'.

"On the one hand, if businesses and households come to expect inflation will remain elevated for longer, that may lead them to start to push up prices and wages more quickly than is consistent with the inflation target," he added.

"On the other hand, as the effects of higher VAT and imported inflation diminish, there is also a risk that weak growth and persistent spare capacity will push inflation well below the target."

While savers would welcome with open arms any rise in interest rates, mortgage borrowers will have their fingers crossed that rates remain low for some time to come.

Following the release of the latest inflation figures yesterday, said that in order to maintain the purchasing power of their savings, a basic rate tax payer needs to find a savings account paying 5.00% pa.

These savers have a choice of just 23 savings accounts that will negate the impact of tax and inflation, including 21 ISA accounts.

Meanwhile, a higher rate tax payer at 40% has the unenviable task of finding an account with a return of at least 6.67% pa, of which only 21 are available.

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