Mortgage rate jumps as fears grow over inflation

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The Independent Online
Britain's largest building society, the Halifax, will increase its mortgage rate today for the second time in four months, following the release of inflation and unemployment figures yesterday suggesting that further interest-rate rises will be n eeded soon to keep inflation under control.

The clutch of economic statistics show that retail price inflation jumped unexpectedly to 2.9 per cent in the year to December while the number of people out of work fell to 2,414,000 last month, the biggest monthly drop for nearly six years. The figuresreinforced fears in the City that the rapid growth in the economy is creating new inflationary pressures that can only be choked off by further interest-rate rises.

The Halifax, which has 1.8 million borrowers, said immediately after the 0.5 per cent increase in base rates in early December that it wanted to avoid an increase in mortgage rates for fear of damaging the fragile housing market. But it has now reversed tack, in a move that is expected to be followed by all the other leading building societies. The Halifax will increase its mortgage rate from 8.1 per cent to just under 8.5 per cent.

This will increase the cost of a £60,000 interest-only loan from £364.50 a month to about £382.50. The change will take effect for new borrowers immediately, and from 1 February for existing borrowers.

If all lenders increase their mortgage rate by a similar amount, it will have a noticeable effect on retail prices from February. Retail price inflation surged to 2.9 per cent in the 12 months to December from 2.6 per cent in November - the highest rate since November 1992. Excluding the mortgage-interest component, it rose from 2.3 to 2.5 per cent.

Kenneth Clarke, Chancellor of the Exchequer, said yesterday that an increase in inflation had been expected, and price increases in 1994 had been the lowest for 30 years. He played down inflation fears, insisting in a BBC Radio 4 World at One interview: "People . . . will be reassured, because put alongside the employment figures and the other information we have had about the economy, this is a very excellent combination of circumstances.''

However, many economists in the City said they found the figures disturbing. Higher excise duties announced in November's Budget explained part of the 0.5 per cent rise in retail prices in December, but the prices of a broad range of goods and services increased too, despite anecdotal evidence of retail discounting.

Many economists concluded that retailers had at last succeeded in achieving higher prices after months of having to absorb higher prices charged by their suppliers without passing them on. If true, there is likely to be more inflation in the pipeline.

The seasonally adjusted fall of 55,000 in unemployment, helped cement City concerns that the base-rate rises in September and December would not be enough to keep inflation under control. Mr Clarke said he would take no risks and had already acted to keep inflationary pressures in check, but the City expects base rates to go up another half percentage point within two or three months.

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