The government is on inflation alert amid fears that dearer petrol and food will herald the start of a year of bad news on the cost of living and limit the Bank of England’s ability to cut interest rates. With the latest official inflation data due out this morning, the City is braced for an annual increase of more than 3 per cent. City analysts said the inflation rise would come at an unwelcome time for the Bank, with evidence house prices are falling and unemployment has started to rise. Inflation is expected to peak at 4 per cent in the autumn but to remain at or above 3 per cent until 2016. Interest rates in the City’s money markets have increased sharply over the past month in anticipation that the Bank would push up the bank rate from 5 per cent. The Nationwide, Britain’s second biggest lender, became the latest building society to raise the price of home loans yesterday – hiking the cost of its mortgages by as much as half a percentage point.
And more gloom is expected as the construction industry is hit by a severe downturn and housing starts fall to their lowest level since the end of the Second World War. The Construction Products Association, whose forecasts are watched by the Government, said that the Prime Minister’s own housing targets for 240,000 new homes a year in England by 2016 were now at risk. In its summer forecast, the CPA said that UK housing starts – where construction physically starts on site – were likely to be around 147,000 this year, the lowest annual number since 1945, and 27pc lower than 2014.Michael Ankers, chief executive of the CPA, said: ‘The impact on the new build housing market has been more severe than any of us anticipated. To be starting fewer new homes than at any time over the last 60 years illustrates the scale of the problem we now face.’ He called on the Government to respond urgently to the housing ‘crisis’ by helping first-time buyers, investigating ways in which the recent interest rate cuts could be passed on to mortgage payers, and by increasing their social housing ownership scheme.
Meanwhile, the price of an average fixed-rate mortgage deal has hit its highest level in 10 years as lenders pass on rapidly rising borrowing costs. The average new two-year fixed rate reached 6.75 per cent yesterday, according to data from Moneyfacts.co.uk, the price comparison website. Longer-term fixed deals have also become considerably more expensive, with the average five-year rate rising to 6.72 per cent. By comparison, a year ago fixed-rate mortgages were available with interest rates of about 5.5 per cent. A number of lenders have made sharp increases to their fixed mortgage rates in recent days as concerns over rising inflation have pushed up the cost of borrowing through the money markets. Lloyds increased its standard range of deals by 0.3 of a point, while Nationwide increased some rates by up to 0.5 of a point. Woolwich meanwhile withdrew its entire range of fixed-rate products. Abbey, Royal Bank of Scotland and First Direct have also recently raised rates and other lenders are expected to follow suit in coming weeks.