Interest rates could be increased by the Bank of England

Record low interest rates that have stayed at 0.5% from 2009 may now be facing the possibility of rising. A member of the group that helped to set up the Help to Buy scheme said that there is room to manoeuvre on interest rates.

However, Ben Broadbent is cautious, “We want to ensure that this recovery continues and is not choked off by a premature rise in interest rates.” Although he believes, “there is a fair amount they could go up before borrowers got into great difficulties.”

Although many householders will find that their monthly outgoings will increase due to their monthly mortgage payments rising, this may also instigate a rise in homes being repossessed. The chief economist from the Bank of England, Spencer Dale commented on this after being asked about the topic: “when we raise interest rates the economy should be stronger, higher employment, higher real wages,” and he states that a rise in interest rates is unlikely as the economy hasn’t risen that significantly. During recent social media activity he said “Rates will only rise when had sustained period of strong growth as long as no risk to stability.”

The new Help to Buy scheme helps new home buyers by only requiring a 5% deposit, covering UK homes selling for up to £600,000 and allowing more to get onto the property ladder.

There are doubts that those on the help to buy scheme may run into money problems once the interest rates have increased, possibly leading to homes under the scheme being repossessed. Ben Broadbent pacified this concern stating that “the numbers entering this scheme are relatively low and although interest rates will, as you say, at some point start to rise, it is worth remembering quite how low a level we are starting from.”

The £375 billion in use for a quantitative easing plan also won’t change according to the Bank Monetary Policy Committee. This decision however has been questioned however, as it is believed that only the financial sector benefits from the package, rather than the entire economy.

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UK CPI and RPI 2012

Inflation Up By 0.1pc For March 2012

UK inflation rose to by 0.1% last month, according to two different indexes. The Consumer Price Index (CPI) reporting an increase from 3.4 to 3.5% and the  Retail Price Index (RPI), an alternative measure of inflation, dipped increasing from to 3.6% to 3.7% for March 2012. These figures will heap further pressure on already hard-pressed households.

The recent rise brings to a halt a five month run of declines, where inflation has dropped from a high of 5.2% in September 2011.

Households were squeezed by high prices and pay freezes throughout 2011 and analysts predicted some relief from the high cost of living this year in 2012. However, this halt in the decrease of inflation is thought to be temporary.

It is predicted that inflation will fall again as last year’s rises in energy prices start to fall out in comparison to last year and economic recovery continues.

This rise in inflation though come as a concern to Bank of England policymakers, who had forecast that inflation would fall rapidly throughout 2012 and 2013. It currently remains well above their target of 2%, reinforcing expectations that the central bank will not inject more cash into the economy next month as part of its quantitative easing programme.

The Office for National Statistics (ONS) has also stated that clothing and food prices were the biggest drivers for inflation last month. Essential food items such as fruit, bread and cereals and meat also saw prices increases in March, as compared to the previous year, which acted as a drag on the overall food category.

Despite fuel prices hitting record highs, the ONS said this had no impact on the rise in inflation since petrol and diesel also rose by similar amounts the previous March.

A spokesman for the Treasury is quoted as saying that “Inflation has fallen by a third since September…most market commentators expect inflation to continue falling later this year, providing ongoing relief for family budgets.”

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