Fears That Interest Rates May Rise Earlier Than Predicted

Interest rates may have to rise sooner than previously predicted to combat rising inflation, the former Bank of England deputy-governor is warning.

In contrast to a recent statement from Ernst and Young’s influential ITEM club that interest rates will stay at record low levels until 2014, former Bank of England deputy-governor, Sir John Gieve, is warning that base rates will have to rise earlier and more sharply to keep inflation under control.

The Bank of England base rate has been maintained at a record low level of 0.5% for almost eighteen months, however Sir John said he “wouldn’t be at all surprised to see interest rates at 2.5 per cent a year from now,”. His view is contrary to most analysts, however.

For example Nick Scarrett, head of investment and pensions said “The vast majority of analysts do not see a rise for some time, and the Bank of England is almost certainly going to leave the base rate as it is on Thursday in an attempt to strike a balance between the risk of inflation and keeping the economic recovery on track”.

Savers and investors seem to be taking the view that interest rates are likely to rise sooner rather than later as found by a poll conducted by Fair Investment Company in which 67% of respondents said they thought the base rate would be higher than 0.5 per cent by July 2011, with 30 per cent predicting a half point increase to 1 per cent and 29 per cent saying they thought it would hit 1.50 per cent in 12 months time.

“Even if the base rate does creep up slightly, there is no saying that savings rates will follow suit. In the 17 months that the rate has been at 0.5 per cent, savings rates have been falling, so it is with this in mind that savers should consider getting a fixed rate savings account before savings rates fall any further, while borrowers just continue to enjoy low loan and mortgage rates.”, Mr Scarrett advised.