An interest rate rise to halt rampant inflation is imminent, experts warned last night.
The Bank of England governor yesterday signalled that families should prepare for a rise, ending two years of historic lows.
Higher borrowing costs could be a major problem for homeowners, who have been lulled into believing that their monthly mortgage repayments would stay this low for years.
A rate rise to 1 per cent would increase monthly repayments on an average £150,000 variable rate mortgage by £43 a month or £516 a year.
Two-thirds of homeowners have a variable rate mortgage, meaning nearly eight million households would pay more.
On top of the rate rise warning, the Bank painted a bleak picture of soaring inflation, rising energy bills and sluggish economic growth.
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In addition, in its quarterly inflation report, the Bank revealed that the squeeze on household incomes – currently the worst in 80 years – is expected to continue for longer than previously predicted.
Until now, Bank of England Governor Mervyn King has urged caution because an early rate rise could plunge the economy back into recession.
But yesterday he gave a heavy hint that the rise in inflation – which the Bank said could hit 5 per cent in the final months of the year – has tilted the balance of opinion towards an early increase.
He said: ‘Bank rates cannot stay at this level indefinitely and at some point it will return to more normal levels.’
Inflation of 5 per cent would be more than double the Government’s target. Just three months ago the Bank said inflation would only hit 4.5 per cent this year.
It is now described as ‘volatile’ and the Bank’s quarterly inflation report notes: ‘There is a great deal of uncertainty about the outlook for inflation.’
It comes as household gas bills are set to jump by an average of £100 and electricity bills by £50 in the next nine months – with no respite for a further two years. At present, the average gas bill is £666 a year and the average electricity bill is £473.
In its report, the Bank also downgraded its economic growth forecasts for this year from around 2 per cent to 1.75 per cent, and said the squeeze on living standards would last longer than initially thought.
But an interest rate rise would come as a relief to Britain’s army of savers, who have lost out since rates were pushed down during the depths of recession in March 2009.
While borrowers would be hit almost immediately by an interest rate rise, savers often have to wait two or three months for the increase to be passed on.
Sources say members of the Bank’s Monetary Policy Committee, which sets interest rates, are now ‘more hawkish’ about a rate rise when they meet on June 9.
Insiders revealed that the Bank nearly voted in favour of a 0.25 per cent interest rate rise in February, but stepped back when figures showed that the economy plunged into negative growth in the last quarter of 2010.
Mr King said yesterday: ‘There is no doubt that we are facing a difficult time ahead with a slow and prolonged adjustment to the consequences of the banking and financial crisis. There is a good chance that, if utility prices rise further later in the year, inflation will reach 5 per cent before falling back through 2012 and into 2013.’
Senior Government sources admitted yesterday that ‘inflation is a bigger worry than growth’.
The warnings follow an unprecedented squeeze on take-home pay from tax rises, record fuel prices and paltry pay rises or pay freezes.
Una Farrell, from the debt advisers Consumer Credit Counselling Service, said: ‘I am concerned that mounting pressures on family budgets will force many to choose between heating their homes and putting food on the table.’
Chancellor George Osborne yesterday admitted that there will be ‘choppy’ times ahead, but insisted he had rescued Britain from a ‘moment of real economic danger’ a year ago.
However, shadow chancellor Ed Balls said: ‘By cutting too deep and too fast George Osborne has delivered the worst of all worlds – higher unemployment, higher inflation and zero growth.’