The UK housing market is currently reacting to the rise in interest rates on the 10th May. The latest increase, from 5.25% to 5.5% means that homeowners are now faced with the highest level of interest since 2001.

Michael Coogan, CML Director General, commented “This rate change was a certainty even before it happened.  But there is every prospect that inflation will be brought back under control more quickly than the pessimists expect. With four out of five recent borrowers choosing fixed-rate mortgages, the effect of the change will be dampened to some extent – although around half of those with a mortgage are on a variable rate and will see their payments change. But borrowers must expect rates to remain at or around their current levels for the foreseeable future and plan their finances on that basis.”

The increase in interest rates will have a further negative effect on those already struggling with increasing mortgage repayments. Research Consultancy Company Experian speculate that a rate rise to 5.5% will trigger nearly 29,000 home repossessions in 2009, compared with 17,000 last year.

The decision to raise interest rates for a fourth time since August 2006 has been brought about by persistently high levels of inflation – with inflation in April hitting its highest level for 10 years; the retail price index hit 4.8%, and consumer price inflation reached 3.1 per cent. According to the Office of National Statistics, the current inflation figure has slowed to 2.8%, which is still higher that the MPC’s target of 2%.

According to the Royal Institution of Chartered Surveyors (RICS), first-time buyers are facing increasing barriers to home ownership. 'They have to save large amounts for deposits, stamp duty and fees and then must spend an ever-increasing share of their income servicing the massive mortgage needed to buy a home, RICS senior economist David Stubbs commented, 'With higher interest rates on the way, the situation looks certain to deteriorate further in coming months.'

Figures from Nationwide for May show that the pace of house price growth has remained resilient – but that the overall trend may be towards a gradual cooling of house prices, with the most recent rise cooling further growth.

Commenting on the figures Fionnuala Earley, Nationwide’s Chief Economist, said: “House prices increased by 0.5% in May, down from 0.9% in April. However, the headline annual rate remained stubbornly in double-digits, largely due to slower house price inflation at this time last year. House prices increased by 10.3% during the year, bringing the price of a typical house to £184,584, almost £17,000 higher than the same time last year. The underlying trend is still showing signs of slowing however. The three-month on three-month growth rate fell to 1.8% in May; its lowest since August 2006. ”

A further increase in petrol prices will affect the current inflation figure; with the cost of crude oil at the highest level for this year, petrol prices at the pump are likely to break the pound-a-litre mark within six weeks. Increasing oil prices are a result of ongoing issues on Iran and Nigeria.  

Ray Holloway, of the Petrol Retailers Association, said petrol prices had been edging higher throughout spring against a backdrop of US stockpiling of crude. But he said the latest increase meant the upward pressure would continue for the next two months.

The Confederation of British Industry (CBI) has stated that the manufacturing sector has continued to grow, and warned that a further rise in interest rates may inhibit this growth.

The minutes from the MPC’s May meeting prompted many analysts to expect a rise to 6% by the end of the summer.