Interest rates could rise in response to inflation increases

February 16, 2011

By Liz Parks

The Bank of England is preparing to increase interest rates, according to analysts.

The quarterly economic forecast published by the Bank of England yesterday showed that inflation is at a two-year high of four per cent, which is double the target figure of two per cent.

Amit Kara, an economist at UBS, repeated claims that the inflation rate was being temporarily increased by factors like high energy and food costs. However, he added that the Monetary Policy Committee predicts inflation will return to the two per cent target figures within two or three years, "under the assumption that the bank rate increases in line with market expectations."

Economists are widely predicting interest rates will reach 1.25 per cent by the end of the year, with increases being made steadily to reflect the increase in commodity prices and VAT.

The news of rising interest rates will be welcomed by savers, who have been struggling to make money from their savings accounts since the interest rate dropped to a record low of 0.5 per cent.

However, borrowers are less likely to welcome the increases, with their repayments suffering as the base rate rises.