Rate rise 'will hamper economy'

The expected interest rate rise tomorrow will hit borrowers and could create economic weakness, experts say.

The Bank of England’s rate setting committee is expected to increase the base rate 0.25% to 5.5%.

“But the Bank needs to beware of overkill,” warns Simon Ward, chief economist as New Star Asset Management.

“The three earlier hikes coupled with a 5% rise in the exchange rate over the last year have tightened monetary conditions significantly. There are signs that growth is beginning to slow, while inflation news is set to improve. A move beyond 5.5% would risk unnecessary economic weakness in 2008.”

Tomorrow’s rate rise is inevitable, agrees Neil MacKinnon, group economist at mutli-currency mortgage manager ECU Group.

However, the only mystery that remains is whether the rate will be ramped up to a half point.

"An interest rate increase of a quarter point is the likely outcome for Thursday,” says MacKinnon. “Anything more aggressive at this stage seems heavy-handed and might also imply that the Bank of England is now worried that its inflation target won't be met."

But mortgage borrowers would feel the most immediate effect of an increase, according to Richard Brown, chief executive of Moneynet.co.uk.

He says: “A further rate increase to 5.5 per cent is bound to slow the market, and the situation for first-time buyers is looking more precarious.”

Research from online mortgage company mform.co.uk suggests that the situation could become desperate for some borrowers.

It says more than one in seven borrowers - around 6.5 million people - could struggle if the Bank of England decides to increase interest rates by 0.25% tomorrow.

Eamonn Rice, chief executive of mform.co.uk, says: “A rise to 5.5% will take interest rates to their highest level for six years. And there is no guarantee that a 0.25% rise will be the last this year.

“Borrowers have got used to low interest rates and many haven’t adjusted to the fact that we may now be entering a period of higher rates. Anyone who hasn’t acted in the face of the three interest rate rises since last August should start now,” he warns.

If you would like to comment on this story or speak to its author, telephone Simon Read on 0207 034 2680.