Interest rates to rise next year

A leading think tank has predicted that interest rates will continue to rise next year despite a slowdown in the property market.

11:56 01 December 2004

A leading think tank has predicted that interest rates will continue to rise next year despite a slowdown in the property market.

According to a new report from the Organisation for Economic Co-operation and Development (OECD), three rate rises will be needed in 2005, which will take the cost of borrowing to 5.5 per cent.

The assessment is at odds with many City economists who believe interest rates will remain on hold throughout next year.

When the Bank of England began raising interest rates in November 2003, many economists predicted the cost of borrowing would level off at around five or 5.25 per cent. However, economic data since the last rate rise in August has lead the majority of observers to believe that rates had peaked at their current level of 4.75 per cent.

But OECD believes that more costly borrowing is needed to dampen strong aspects of the economy due to inflationary pressures in the labour market.

"The slowdown and continuing low inflation warrant a pause in monetary tightening, although further tightening may be needed during 2005, in particular due to increasing pressures from the labour market," the report states.

Increases in the level of base rate will make mortgage and general lending more expensive, while rewarding savers.