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Rate rise 'not inevitable' says King

11th October 2006 | back to article listings BACK    print this article PRINT

Interest rates may not rise in November as has been widely predicted, the governor of the Bank of England speculated last night.

Since the monetary policy committee's (MPC's) decision to rise rate by a quarter of a per cent in August, analysts have predicted that the Bank of England would do so again by the end of the year, in a bid to stave off gradually increasing inflation.

But in a speech in Winchester yesterday evening, Mervyn King said that falling energy prices had eased inflationary pressures, meaning that it is not a forgone conclusion that the committee will vote in favour of a raise.

As petrol prices have dropped by around ten pence per litre, Mr King said it is now unlikely that inflation would breach the feared three per cent threshold by Christmas, a level which requires the Bank of England governor to write an explanatory letter to the chancellor.

Currently the consumer price index is at 2.5 per cent, half a percentage point above its desired rate.

Mr King explained: "Since their peak in early August, oil prices have fallen by around a quarter. In due course, that will ease the pressure on petrol prices and fuel bills, including gas and electricity."

However, he added that this "anticipated fall in inflation in September may not persist for long" and urged wage bargainers not to be "sufficiently restrained" in their negotiations, or else run the risk of driving up the consumer price index.

Despite his speculation, Mr King warned that "nothing in this speech is meant as a hint about our decision in November, which will be based on an assessment of the outlook for inflation two years or so ahead".

The effect of a rate rise would make mortgages more expensive, putting pressure on homeowners' wallets and causing people to take a more cautious approach to their pursuit of a new home.

Evidence from the British Bankers' Association at the end of September showed that there were only 184,557 mortgage approvals, down five per cent on August 2005.

Howard Archer, chief UK and European economist at Global Insight, then said that the weakening number of approvals "hints that August's interest rate hike and the possibility of more interest rises to come could be starting to have some dampening impact on housing market activity".

But Mr King's speech last night will give homeowners hope that their mortgage repayments will not increase as a busy retailing period in December looms.

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