Base rate at 5pc ‘by autumn’](http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2004/02/08/cnrate08.xml&menuId=242&sSheet=/money/2004/02/08/ixcity.html)
Interest rates are set to rise to 5 per cent as early as September in a bid to cool the rampant housing market and dampen frenetic consumer spending, according to the Ernst & Young ITEM Club, the economic forecasters which use the Treasury’s economic model.
Professor Peter Spencer, ITEM’s chief economic adviser, has warned that evidence is growing that consumers are “turning a blind eye” to the Bank of England’s steady interest rate increases.
ITEM’s last report said interest rates would rise to 5 per cent by Spring 2005. But Spencer is now warning that rates are likely to reach that level by the early autumn if spenders and borrowers fail to “come to their senses”.
Spencer said: “People may go on blindly borrowing and buying houses until we go through 5 per cent or 6 per cent, at which point there will be a straw that breaks the camel’s back . . . This is a frighteningly real possibility.”
The Bank of England’s Monetary Policy Committee raised interest rates from 3.75 per cent to 4 per cent last Thursday. This came after a quarter-point rise in November.
Spencer said there is no evidence that higher interest rates are biting. House prices grew by 2.2 per cent in January, according to Halifax, Britain’s biggest lender, the highest monthly increase for 15 months.
High street spending also remains buoyant. Last week, the CBI’s closely watched retail sales survey revealed that 53 per cent of store groups were reporting sales up on a year ago, while only 15 per cent said they were down. This was the most positive balance for nearly two years.
Tomorrow, the British Retail Consortium and KPMG retail sales monitor is likely to confirm the trend by showing that like-for-like sales rose by more than 3 per cent in January.
In the late 1990s Alan Greenspan, the chairman of the US Federal Reserve, tried and failed to contain the dotcom boom with quarter-point interest rate rises.
“Greenspan’s approach didn’t have much of an impact until the market was so overvalued that it collapsed under its own weight,” Spencer said. “The worry is that this will happen to the UK housing market.”
