Bank hints at further rate rise

Householders already struggling with increased mortgage payments are likely to see interest rates hit 6 per cent in the next few months.

The increase to 5.75 per cent last month saw the cost of borrowing reach its highest level since March 2001. Analysts expect rates will peak at 6 per cent early next year, easing back throughout 2008 and 2009.

In its key quarterly inflation report - the biggest indicator on the future direction of interest rates since May - the Bank of England said a further rate rise may be needed to bring inflation back to the Government's 2 per cent target within two years.

The Bank said consumer spending has been "surprisingly resilient" in the face of base rate rises, although it added that there are signs of a slowdown in the housing market.

The BoE said the Consumer Prices Index (CPI), the official measure of inflation, is expected to remain above target in the near term as higher oil prices put upward pressure on the cost of living, even with a further hike in rates taken into account.

The Bank has been struggling to bring inflation back to target for more than a year now. In March, CPI reached 3.1 per cent which was its highest level for at least a decade.

CPI has since been falling back, thanks largely to lower energy bills but official figures for June showed that the rate of inflation had only slowed to 2.4 per cent, which was less than many economists were expecting.

The Bank's report also said that the recent heightened volatility in financial markets and the tightening of credit on fears over US sub-prime mortgages, had eased the upside risks to inflation.

Fears over food inflation, which is said to be rising as a result of crop damage from the June and July floods, has also cast doubts over the CPI.

Next week, minutes of the Bank's August rates' meeting, when rates were kept on hold, are due out and are expected to shed light on the possible timing of a further rate hike.

Bank of England governor Mervyn King said there was greater-than-usual uncertainty about the outlook for inflation.

He added: "The main upside risk to inflation is that, with a limited degree of spare capacity, businesses may be more confident about raising prices than assumed in the central projection.

"And continued strong growth of the world economy may put further upward pressure on commodity and other import prices."

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