The rise in UK interest rates to the interim target of 5.50% is expected to occur at mid-day tomorrow. The rises in interest rates towards the Market Oracle target of 5.75% by Sept 2007 are a consequence of the Bank of England failing to control inflation.

Inflation as measured by the CPI is above the banks target of 3% at 3.1%. RPI which is the more recognised measure of inflation has accelerated to a high of 4.8%, well above the old target of 3% prior to the Bank of England switching to the CPI as a measure of inflation.

The rise above the upper band has increased the risk of a possible move of 0.5% tomorrow to 5.75%, however the bank has so far not raised interest rates by 0.5% during the last 10 years so such a move can be discounted as extremely unlikely to occur tomorrow.

5.50% interest rates will put a delayed strain on the UK housing market that will start to be felt in the housing indices following the summer strength period. As the rate hikes to date and the further hike to 5.75% will start to hurt mortgage borrowers, especially as short-term fixed deals continue to expire whilst existing favourable fixed deals have been steadly removed from the market over the past month.

By Nadeem Walayat
(c) MarketOracle.co.uk 2007

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