Mortgage bills set to rise if Bank of England hikes interest rates after UK inflation soars to 5.4%

Homeowners will be hit by rising mortgage bills if the Bank of England heeds economists’ calls to increase interest rates in order to tackle the ballooning prices of everyday goods.

The UK’s national bank is facing pressure to put up interest rates at a faster rate than previously planned to help puncture soaring inflation.

UK inflation leapt to 5.4 per cent in December – its highest level in nearly 30 years – as millions of households felt the pinch when it came to covering grocery, fuel and energy bills, official figures show.

The Office for National Statistics’ Consumer Prices Index (CPI) is the favoured measure of inflation for Government, which tasks the Bank of England with keeping inflation at two per cent.

The Bank of England base rate sets the level of interest at which all other banks charge borrowers, meaning when the national bank raises interest rates, so do the rest of the nation’s lenders.

The Bank raised the base rate on 16 December from 0.1% to 0.25% to try to curb inflation.

Last month’s CPI increase marked the biggest jump since March 1992, when it stood at 7.1 per cent, the ONS said.

Food and drink, restaurant and hotel bills and rising furniture and clothing costs were the primary factors driving inflation, while consumers also contended with energy bill hikes.

A rise in the energy price in October cap left millions of households paying £139 more per year on their energy bills.

Forecasts vary but analysts believe billpayers will see energy prices rise by up to £700 per year on average without Government intervention when regulator Ofgem raises the cap again in April.

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Now, with economists predicting that CPI inflation will continue to rise, peaking at over seven per cent in April, the Bank of England is facing calls to speed up planned interest rate rises – meaning bigger mortgage bills for homeowners.

“We think the Bank will raise interest rates faster than most expect this year, from 0.25 per cent to 1.25 per cent, with the next hike to 0.50 per cent coming on 3February,” said Paul Dales, chief UK economist at research consultancy Capital Economics.

Melanie Baker, senior economist at fund manager Royal London Asset Management said that fears about inflation rising beyond April were “likely to build” unless the Bank takes action.

Speaking to MPs on the Treasury Committee hours after the ONS figures were released, Bank of England Governor Andrew Bailey said the central bank will do everything it can to control inflation.

Chancellor Rishi Sunak said: “I understand the pressures people are facing with the cost of living, and we will continue to listen to people’s concerns.”


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