CBI says UK interest rates need to rise in 2011

Higher-than-expected inflation means the Bank of England should start raising interest rates from the spring of next year, according to latest forecasts by the Confederation of British Industry (CBI).

With recent pressure from energy and commodity prices as well as the impact of higher  VAT in the New Year, the CBI predicts that inflation will “significantly exceed the Bank of England’s 2% target in 2011”.  As a result, it believes that interest rates will rise gradually from next year through to mid-2012 – finishing 2012 at 2.75%.

We’ll have to wait and see whether or not this forecast proves accurate, but as things stand, there is a growing expectation that rates will rise at some point next year.  Swap rates, which reflect the market’s expectations of future interest rates, have jumped following rises in inflation in both October and November.

If rates did rise from their current level of 0.5% to 2.75%, what would that mean for your mortgage?  If you’re on a fixed rate mortgage, your rate and monthly payments will be protected from any rate rises until your fixed rate period ends.  If you’re on a variable rate, then you’re monthly payments will rise – by how much will depend on the type of deal you have and the size of your mortgage.

The below table shows the effect of rate rises on a £150,000 interest only mortgage – to see what effect a rate rise would have on your own mortgage, try our rate change calculator.

Rate change table

If rates were to rise by 2.25% between now and the end of 2012, many borrowers will be paying substantially higher monthly mortgage payments than they are now – although, bear in mind that any rises are likely to be gradual.

If you’re concerned about rising rates and haven’t yet fixed your mortgage rate, then now could be a good time to do so.  With swap rates climbing, we could see lenders putting up the cost of their fixed rate mortgages early next year.

Click here to see our latest best buy mortgage rates.

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