Interest rates to rise in February, says think-tank

Interest rates are set to rise in February after six years at 0.5%, according to a think-tank.

The National Institute of Economic and Social Research (NIESR) said the Bank of England would raise interest rates at the start of 2016 to ensure inflation stays at its 2% target, increasing mortgage costs for millions of families in the UK.

NIESR said the BoE will then gradually increase them by 0.5% a year, reaching 2% by the end of 2018.

This contrasts with recent economic forecasts which have suggested an interest rate rise was not on the horizon until 2017.

NIESR said domestic demand will continue drive growth this year and next as households take advantage of purchasing power improvements from the low inflationary environment and firms continue to invest.

Despite the recent slowdown, NIESR expects the economy to expand by 2.4% this year and by 2.3% in 2016. Consumer spending coupled with business investment will see inflation rise 1.1% in 2016 hitting 2% from the middle of 2017.

Mortgage provider Ocean Finance has warned that just a 1% rise in interest rates could cripple nearly seven million homeowners.

It said that a 1% hike in interest rates could see borrowers with standard variable rate mortgages pay an extra £55 a month for every £100,000 owed.

According to research by the firm, having to meet increased mortgage payments could force about 10% of homeowners to sell their home to avoid the higher cost of their mortgage.

Additionally, 63% of borrowers say they would have to cut back on all non-essential spending to cover the additional cost, while a further 13% are concerned they would quickly get into financial difficulty.

Gareth Shilton, Ocean’s spokesperson, said: “It’s inevitable that interest rates will rise at some point. Whilst the rate rise is likely to be gradual, every rate hike will have an impact on hard working families who are already struggling to make ends meet.

“Many people will feel like mortgage prisoners because their circumstances have changed since they took out their loan and they’ll understandably be concerned about what a potential interest rate rise means for them.

“It’s important to understand that in most cases there are options, so it’s important that anyone who is concerned about a rate increase should seek advice on the best deal available to them.”