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Interest rate rise could spell doom

Monday May 10th 2010

Record low interest rates are expected to be kept on hold but homeowners will be worried that the uncertain political and economic landscape could mean interest rates rise sharply in the months ahead.

The Bank of England's rate setters postponed their scheduled monthly meeting last week due to the General Election, but they meet on Monday to deliberate on what they should do with the cost of borrowing.

If the base rate is increased quickly in the coming months, homeowners who have previously enjoyed low payments on their mortgages may find they have much larger outgoings. The risk underlines the importance of, which can cover mortgage payments if the policyholder loses their job suddenly or is unable to work due to accident, ill health, or because they are required to be a carer.

The level of the £200 billion quantitative easing, which aims to boost the money supply, is likely to be kept on hold. Quantitative easing sees the central bank pump money into economy directly by buying assets, usually government and corporate bonds.

But members of the Monetary Policy Committee (MPC) will have much to consider as they conclude their two-day meeting - not least the affect of a hung Parliament on the outlook for the UK economy.

Talks between the Conservatives and the Liberal Democrats over the possibility of forming a coalition continued on Sunday.

But the two parties have very different views on the timing of tackling the UK's deficit, further adding to the current economic uncertainty.

Another issue at the top of the committee's agenda will be the unexpected stubbornness of above-target inflation as soaring oil prices push up the cost of living.

Policymakers were unnerved last month by a bigger-than-expected rise in the benchmark Consumer Prices Index (CPI) in March, to 3.4% from 3% in February.

Copyright © Press Association 2010

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