Rates to go up and banks cash in

Homeowners have again been warned to expect the Bank of England’s base rate to go up to 6% before Christmas.

The Bank’s quarterly inflation report makes it clear that a further rise in the base rate is probably going to be needed to keep the lid on rising prices.

The government’s preferred measure of inflation, the Consumer Prices Index (CPI) is still at 2.4% - above the government target of 2% - kept high mainly due to higher oil prices. The Bank also fears that higher food prices may be coming as a consequence of the crop damage caused by floods over the summer.

If there is a rise to 6% in the autumn it would be the sixth in just over a year, five quarter point rises having taken the rate from 4.5% last July to its current level of 5.75% - its highest since March 2001.

Recent reports have shown that home repossessions are on the increase as homeowners struggle to keep up with mortgage payments that have been increasing over the past year. Neither families nor government ministers are going to relish the prospect of another rate rise.

The situation will be made worse by the fact that so many people are due to come off two-year fixed rates that were taken out when interest rates were below 5%, and they will be remortgaging at over 6% with huge associated fees that were not there last time they negotiated a deal. The City is hoping that rates peak at 6%, and then ease back during 2008 and 2009.

The inflation report said that inflationary pressures had actually ease in the wake of recent financial market volatility and the tightening of credit after the sub-prime mortgage crisis in the US.

Inflation has been stretching the minds of the Bank’s Monetary Policy Committee (MPC) for the last year, and CPI peaked in March at 3.1%. Although inflation has receded since then, mainly thanks to lower energy bills, it has not come down enough to prevent rate rises in May, July and more to come.

Consumer spending, said the Bank, has been surprisingly resilient in spite of the five rate rises, although recent figures have been seen as evidence of a slowdown in the housing market. Bank Governor Mervyn King said that the outlook for inflation remained uncertain, and that the Bank would monitor developments carefully before deciding what action would be needed.

The minutes from the MPC’s meeting in early August are released next week, and should hold some clues about when the next rise will come. If rates do go up again, economic growth is predicted to slow to 2.5% by mid 2009, then rise again to 3% in the following three years.

Meanwhile banks has been accused of greed as credit cards and overdraft interest rates have been put up by more than July’s base rate rise of 0.25%. Amazingly two banks saw fit to put a 5% increase in one month onto cash withdrawals. Authorised overdraft rates have also rocketed - some by 3.4% in a year – even though in that time the base rates has only gone up by 1.25%.

It is a thinly disguised attempt by the banks to recover the millions of pounds they have had to return for overdraft penalty charges. Barclays, Halifax, HSBC, Lloyds TSB and RBS-NatWest have set aside £400m for compensation payments between them.

Lloyds TSB made nearly £2bn in profits in the first six months of 2007. Despite that is has increased its overdraft rate on its Classic Account from 19% to 19.3%. The Classic Plus Account now has an overdraft rate of 18.9% - up from 18.6%. Similar increases of 0.3% were made after May’s 0.25% base rate rise. The Classic Plus account has seen the overdraft rate go from 15.5% to 18.9% in the last years – 3.4% compared to a base rate rise of 1.25%. The bank has also raised commission charges on its debit card if used abroad from 2.75% to 2.99% - just as holiday season gets into full swing. It makes you wonder in what way two billion pounds in six months is not enough profit!

The Bank of Ireland (GB) has put its overdraft rate up from 20.15% to 20.45% on its high-interest current account. The unauthorised overdraft rate is up by 0.34% to a staggering 39.49%.

Alliance & Leicester has a much better overdraft rate on its Premier Direct account. It is 0% in the first year, and 5.9% after that.

Nationwide has increased the interest rate on cash advances via credit card from 18.9% to 22.9%, and the cash withdrawal fee has gone up from 2% to 2.5% - the minimum payment going from £2 to £3.

Halifax has put up the commission charged on overseas credit card transactions from 2.75% to 2.95%. The cost of withdrawing cash has gone up from 2.5% to 3%, and the purchase rate on its web-based One card, with a nine-month 0% purchase and balance transfer offer, has been put up by 4% from 9.9% to 13.9%.

Barclaycard has sent some customers credit card cheques for balance transfers with a 3% fee, up from the standard 2.5%. However, it does offer the best borrowing rate on credit of 6.8% on its Simplicity card.