Bank of England to raise interest rates in the Spring, says CBI

 But should you listen to them?

Yesterday the Confederation of British Industry (CBI) predicted that higher inflation would force the Bank of England to raise rates as early as the Spring.

So what is the CBI?

In their own words ‘The CBI is the UK's top business lobbying organisation. Our unmatched influence with government, policymakers and legislators means we can get the best deal for business – at home and abroad’.

So why are they predicting interest rates will rise?

Yesterday the CBI published its economic forecasts which included predictions that:

• The Consumer Price Index (CPI), which is a measure of inflation, will rise to 2.4% by the end of next year. The Bank of England’s official target is 2%
• That the Bank of England will be forced to increase interest rates next spring to combat rising inflation.
• Interest rates could rise by as much as 2.25% over the next two years

 Should you be worried?

 The people who would be affected any increase would be the 7million home owners on variable rate mortgage deals (including me). Should interest rates rise then so will their monthly mortgage repayments. People with long-term fixed rate mortgage deals won’t be affected

 But a few points to bear in mind:

• This is one organisation’s viewpoint and they get it wrong! They made the same prediction in September last year but interest rates have remained unchanged to this day.
• The Council of Mortgage lenders claim that if interest rates rise in line with the CBI’s predictions then around 2.9 million home owners would struggle to pay their mortgages

 So when the Bank of England does increase interest rates (and they will have to at some point) then there is a delicate balancing act to get right. On the one hand raising rates to combat inflation and return to some sort of economic normality – but on the other trying to avoid tipping households over the edge by making their mortgages unaffordable.

So when will interest rates rise?

I’ve answered this in my article Latest interest rate predictions – December 2010.

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