Bank expected to raise UK rates

Mervyn King has warned consumers should expect more rate rises

Figures showing continued house price strength have added to expectations of a rise in UK interest rates this week.

The Bank of England's Monetary Policy Committee (MPC) is beginning its two-day July meeting, where it is expected to lift rates to 5.75%.

Although rates were kept at 5.5% at last month's meeting, four out of the nine MPC members voted for a rise.

House prices rose 0.4% in June, the Halifax bank said, with annual house price inflation up from 10.6% to 10.7%.

Oliver Gilmartin, senior economist at the Royal Institute of Chartered Surveyors, said this equated to an average price growth of £250 a week.

This indicated that the MPC would raise interest rates, he said as "the economy continues to show solid expansion with price pressures remaining a worry".

A trading update from estate agent Savills released on Wednesday said that while rate rises had started to bite in some provincial areas, demand in London and the South East remained "strong".

Spending concerns

The Bank will unveil its latest decision at midday on Thursday.

Analysts who expect rates to rise have pointed to the Bank's recent warnings about inflation.

While UK inflation fell to 2.5% in May, it still remains above the government's 2% target.

Bank of England governor Mervyn King, who chairs the MPC, said last month that people should expect higher interest rates by the end of this year unless consumers and companies slowed spending.

He said the Bank was concerned that spending was rising faster than the economy's ability to cope with the higher demand, and said that "more persistent inflationary pressures have picked up".

If rates do rise, consumer spending growth is likely to slow, according to accountancy firm PricewaterhouseCoopers, which has published a report saying that the amount households are spending on paying off debt has reached record levels.

Repaying money borrowed, and the interest on it, now takes up 19% of the average UK household's disposable income, PwC said.

Rate hold urged

Philip Shaw, chief economist at Investec, said that an increase to 5.75% at this month's meeting was definitely the most likely outcome.

We now believe that there are indications that the medicine applied so far is beginning to take effect and the case for another rise is not made Steve Radley, EEF

"We have long argued that the committee would be unlikely to wait until the next Inflation Report in August to tighten again," he said.

"Does this view look correct? We very much think that it does."

Despite the predicted rise, business leaders have urged the Bank not to raise interest rates this week.

Earlier this week, the EEF business group pointed to the fact that while inflation remains above the government's target, it is now falling, thanks to the four increases in interest rates since last August.

"We have supported the Bank all the way through the current cycle of increases," said EEF chief economist Steve Radley.

"However, we now believe that there are indications that the medicine applied so far is beginning to take effect and the case for another rise is not made."