18 January 2011

Interest Rate Hikes Could Cost Households £1800 Per Year

UK Households could find themselves having to pay an extra 1800 per year interest on their debts if interest rates are hiked as predicted.
A study published on Monday by Pricewaterhouse Coopers forecast that the current central bank base rate of 0.5 percent will rise to 5 percent over the next four years, possibly starting as early as June this year.

The news is worrying for UK households who are already struggling from the recent VAT rise, wage cuts and rising costs of petrol, food, clothing and energy.

However, many City analysts believe that a rate rise is necessary in order to curb the escalating levels of inflation as retailers will be forced to lower prices if consumers have less to spend.

Philip Shaw, economist at Investec said that the Bank of England is under pressure to address the inflation issue with both the Consumer Price Index and Retail Price Index way over the government target of 2 percent.

'We were originally forecasting that interest rates wouldn't rise until the back end of 2011 but there is a real risk the Bank of England's monetary policy committee will have to raise rates sooner rather than later to protect its credibility,' Mr Shaw said.

Yet some members of the Coalition and other in the City believe that a sudden hike in interest rates could be extremely damaging to the UK’s economic recovery and put the country as risk of a double-dip recession.

They believe that inflation will automatically drop over the next two years without the Bank of England having to take action.

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