Shock UK interest rate rise

The Bank of England has increased interest rates from 5% to 5.25%, which could mean higher mortgage payments for homeowners.

Linden chief executive Philip Davies said: “It is likely to price many remaining first time buyers out of the market. This will result in stagnation and prevent existing homeowners from moving up the ladder.”

Consumer inflation has recently risen to 2.7%, the highest level in more than a decade. Some analysts expect inflation to exceed 3% in the near future. It is hoped the increase in rates will help curb this.

The government target for inflation is 2%.

While the rate rise will put an extra £16 on to the monthly outgoings of those with a £100,000 repayment mortgage, it is good news for savers. If banks and buildings societies pass on the increase to their savings rates, savings accounts will earn more interest.

Analysts had been expecting a rate rise in the near future. However, many are surprised that the third rate rise in five months has come so soon.

“The timing is a surprise” said Ross Walker, an economist with the Royal Bank of Scotland.

“What this perhaps tells us is that we have a nasty inflation number coming next week and they wanted to act pre-emptively.”

The BoE announcement led to a slight fall in the FTSE 100, among concerns that the rate rise could cause a slow-down in the housing market.

The Royal Institution of Chartered Surveyors said the rise was likely to dampen housing demand, while the Council of Mortgage Lenders said those with variable rate mortgages should factor the possibility of another rise into their future calculations.

Interest rates in the Eurozone were kept steady at 3.5%.

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