Interest rates must rise, business group warns

The Bank of England will have to hike interest rates by at least 2 percentage points over the next two years, business leaders have warned. It believes rates will start to rise in the New Year.

In total, interest rates will need to jump from their current low of 0.5% to 2.75% by the end of 2012, in order to cope with rising inflation, the Confederation of British Industry said.

Such a rise would put nearly £200 extra on monthly payments of a typical £150,000 floating interest rate mortgage.

Taken in conjunction with Nationwide’s prediction of a 10% drop in house values for next year, that would be thoroughly bad news for home-owners.

According to the Bank of England, two-thirds of UK borrowers are now on floating interest rate deals, and the proportion is rising.

Ian McCafferty, CBI chief economic adviser, said that the ‘persistent strength’ of energy and commodity prices was a growing concern and was pushing up the cost of living.

According to the CBI, inflation as measured by the Consumer Price Index – which was 3.3% in November – will hit 3.8% in the first three months of 2011 and will stay well above the Bank’s 2% target for two years.

The CBI also downgraded its forecast for UK economic growth in the first quarter of next year. The group expects growth of 0.2%, down from 0.3%, as the fall in public sector spending and higher inflation drag the recovery.

The group stressed that it does not expect Britain to slide back into recession, although it does forecast higher unemployment.