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Tuesday, June 12, 2007

Rate Rises In The Pipeline

Those of you who breathed a sigh of relief last Thursday, when the Bank of England chose not to raise interest rates, should take heed from the warning issued by Mervyn King (Governor of The Bank of England).

King, in a speech to business leaders at a CBI dinner in Wales, has put borrowers on notice that there will be further rises in rates. King warned of "persistent inflationary pressures" the result being that the Bank "may need to take further action".

King warned of the dangers of excess debt:

"It is unwise to borrow so much that the repayments are affordable only if interest rates remain at initial levels."

That is a clear message to all, that further rates rises are coming.

King noted that there are inflationary pressures within the system, as there are attempts by businesses to raise prices as spare capacity has been taken up by strong demand stoked by a buoyant world economy, as well as the fastest growth in business investment for almost a decade.

King added:

"There has been some underlying upward pressure on inflation that is in part hidden by the volatility in domestic energy prices."

He said that the Bank's Monetary Policy Committee (MPC) would be watching gauges of spare capacity, of companies' pricing plans, and of inflation expectations.


"If these indicators remain elevated, the MPC may need to take further action."

The message is clear, those of you who are heavily in debt need to ensure that your finances can withstand a rise of between 0.5% to 1% in rates in the coming year.

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