Homeowners braced for new rate rise

Home-owners face the prospect later this week of the third increase in the cost of their mortgages in as many months.

The Bank of England is set to raise interest rates tomorrow after figures showed inflation above the Government target. Banks and building societies are certain to do the same. A quarter point increase in mortgage rates would add about pounds 10 a month to the cost of a typical pounds 50,000 home loan.

The mortgage increases that have taken place so far since the election have already cost the typical borrower pounds 20 a month. The Chancellor, Gordon Brown, also announced in last week's Budget that he would scale back mortgage interest tax relief from next April.

The prospect of a further rise in interest rates also sent the pound higher on the foreign exchanges and prompted warnings that British industry's export prospects will be damaged.

Disappointing figures showing that underlying inflation rose above the Government's target last month lay behind the interest rate warnings. It picked up to 2.7 per cent in June.

The immediate culprit was a jump in the price of vegetables, especially tomatoes and cauliflowers due to the bad weather. But economists said the pace of consumer demand has made it all but certain the Bank of England will raise interest rates. Most commentators expect a quarter point increase in base rates to 6.75 per cent to be announced tomorrow.

The silver lining in last month's storm clouds is that foreign holidays will be cheaper this summer. The prospect of an interest rate rise meant a pound climbed above the psychological 10-franc barrier yesterday.

This latest gain in the value of sterling on the foreign exchanges, which has amounted to 25 per cent during the past year, led to warnings that British industry will pay a high price in reduced exports, output and jobs. One City expert predicted the pound would soon climb to its highest level for a decade.

Former Chancellor Kenneth Clarke warned that by allowing the pound to climb Mr Brown risked damaging industry. "He is doing damage to manufacturing, to exporting, and to jobs that depend on that part of the economy," he said.