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Summer could see interest rate rise

Interest rates could rise as soon as the summer amid signs that inflation will remain above target well into next year, homeowners were told today. The Bank of England's base rate has been at a record low of 0.5% for 22 months and many economists had expected it to stay there for all of this year.

However, those forecasts have been tested by today's figures, which were much higher than expected and raised doubts about whether the Bank will be able to maintain its current level of emergency support for the UK economy.

One theory in the City is that the Bank might opt for a small, tactical one-off rate hike in order to demonstrate its concern about inflationary pressures.

Chris Redfern, a senior dealer at Moneycorp, said: "The markets are now braced for a summer increase in interest rates, as it is unlikely that the Bank of England will be able to sit idly by as public inflation expectations creep steadily higher."

Howard Archer, chief economist at IHS Global Insight, said his view that rates will not rise until the final quarter of 2011 was under strain.

He added it was increasingly possible the Bank will make a token rate rise, possibly before July, to show it "has not taken its eye off the inflation ball".

It is thought January's inflation figure will hit 4% and remain high for much of the year due to factors such as VAT and commodity prices.

Copyright © Press Association 2011

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