Borrowers look to inflation figures for base rate reprieve

Mortgage borrowers will get a clearer view this week of whether the cost of their home loans is set to rise further, with the release of a series of official figures on inflation and the wider economy.

The statistics will be particularly keenly watched after the publication last week of the Bank of England's quarterly Inflation Report. Mervyn King, the Bank's Governor, warned there was now a 50 per cent chance over the next six months of the Bank being forced to write to Gordon Brown, the Chancellor, to explain why inflation had risen above 3 per cent.

Such a rise would put severe pressure on the Bank's Monetary Policy Committee to raise interest rates further, after the 0.25 percentage point rise announced earlier this month.

This week's announcements include the latest monthly inflation figures, due to be unveiled tomorrow. Any significant rise in inflation in July from the 2.5 per cent recorded in June would be bad news for mortgage borrowers, particularly as some of the factors the Bank said last week would add to inflationary pressures - such as rising university tuition fees - have yet to be included in the figures.

In addition, the Royal Institute of Chartered Surveyors will publish its latest report on the housing market tomorrow. Signs that the recovery in house prices this year has strengthened would put further pressure on interest rates.

This week's figures also include unemployment statistics, which could dampen expectations of rate rises if joblessness has continued rising, and retail sales. These have strengthened in recent months, giving the Bank of England greater reason to think consumer confidence is sufficiently robust for further base rate rises. However, Paul Niven, head of asset allocation at F&C Asset Management, said that while last week's Inflation Report had added to concerns that interest rates might be increased again this year, many economists were unconvinced about the case for further rises.

"The Bank is mindful that any near-term spike in inflation - even one that necessitates a letter to Gordon Brown - will likely be shortlived, and that a moderation in global growth will reduce inflationary pressures into 2007," he said.

"While one more hike now looks likely before the end of the year, a more bearish read of the admittedly hawkish commentary is premature."

Quentin Fitzsimmons, an economist at Threadneedle Investments, said that asset prices in the capital markets did not reflect a view that interest rates were likely to rise substantially higher.

"The markets appear not to have interpreted the Inflation Report as the precursor to a series of rate rises," Mr Fitzsimmons said.

"Bond values have recovered much of the ground lost in the aftermath of the base rate hike, while long gilt prices are now actually considerably higher than before that announcement."