Savers set for New Year boost as Bank of England hints at interest rate raise

Call for a rise: Andrew Sentance of the Bank of England

Call for a rise: Andrew Sentance of the Bank of England

Higher interest rates are needed to help boost the economy, a leading Bank of England economist said yesterday.

They will also help keep a lid on inflation, according to Andrew Sentance, a member of the Bank’s monetary policy committee.

Next week’s VAT increase will push up inflation, which could force the Bank to raise rates.

But this will help the economy by generating better returns for Britain’s army of savers who have lost out since rates hit rock bottom in March last year, Mr Sentance said.

VAT is due to rise from 17.5 per cent to 20 per cent next week, which will push inflation above 4 per cent, he added.

This will make the Bank likely to ‘gradually’ raise rates from the record low of 0.5 per cent – a blow to millions of borrowers but a boost for savers.

And Mr Sentance insisted higher rates ‘should be seen as a positive signal that the economy is beginning to return to normal after the recession’.

But that will be of little comfort to hard-pressed families struggling to make ends meet as the price of everyday goods soars.

An interest rate rise from 0.5 per cent to 1.5 per cent would add £87 to monthly repayments on a typical £150,000 home loan – an extra £1,044 a year.

But Mr Sentance said higher interest rates ‘would help to protect savers from the effects of higher inflation by raising the return on their savings deposits’.

With inflation at 3.3 per cent, basic rate taxpayers need to find an account paying 4.13 per cent to stop their savings being eroded, while higher-rate taxpayers need an account paying 5.5 per cent.

There are just two such accounts available to savers paying 40 per cent tax, according to Moneyfacts.

A survey of professionals in the City of London by management consultancy Goodacre UK predicted that rates would hit 1.5 per cent in 2011.

George Buckley, chief UK economist at Deutsche Bank in London, said higher interest rates posed a ‘big risk’ to the economy at a time of deep cuts to government spending and more than 300,000 public sector job losses.

Base rate

The Bank cut rates to 0.5 per cent in March 2009 to boost the economy during the depths of the recession.

But Mr Sentance has been calling – so far without success – for rates to rise since the summer to tame inflation which has been well above the 2 per cent target all year.

He said: ‘It is clearly important that interest rate rises do not derail the recovery

‘A gradual rise in the official Bank rate from a record low level of 0.5 per cent should be seen as a positive signal that the economy is beginning to return to normal after the recession.’

The Treasury said the VAT rise will pull in an extra £13billion a year and was vital to cut Britain’s record debts.

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