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July 5, 2007

Base Rate Increases to 5.75%

by Gill Montia

Story link: Base Rate Increases to 5.75%

The Bank of England has increased its base rate from 5.5% to 5.75%. The increase is the fifth since August 2006 and follows warnings from the Bank’s Monetary Policy Committee (MPC) that inflationary pressures remain a danger.

The content of the MPC’s statement accompanying the news was similar to the one issued in May, when the base rate was last increased, and some analysts are expecting one further rise this year.

Others are arguing that the impact of earlier rises has not yet fully been felt and that there is a danger of damage to the economy if the rate rises above 5.75%.

Prior to today’s increase, the Consumer Prices Index was already expected to return to the Government’s target of 2% by the end of 2007; it slowed from 2.8% in April to 2.5% in May.

Many businesses have concerns that a further rise would continue to increase the strength of sterling against the US dollar, thus impeding exports.

It is also possible that the latest rise could further slow housing demand, not least because of the effect it will have on first time buyers, whose borrowing capacity will be reduced.

The new rate will add £16 a month to the average £100,000 repayment mortgage and whilst there is widespread concern that higher mortgage costs could leave many borrowers facing difficulties, the news is at least good for savers.

 

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