BANK’S XMAS BOMBSHELL! – 5% interest rates are on the way

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Bank of England Monetary Policy Committee (MPC) member Paul Fisher dropped a Christmas bombshell yesterday.

He revealed that the Bank’s policymakers would like to see a tenfold hike in the current 0.5 per cent bank rate to reach a ‘normalised’ level of about five per cent.

The Bank has left its key lending rate at a record low 0.5 per cent since March 2009.

But with inflation fears mounting by the day, as prices are already rising ahead of January’s VAT increase to 20 per cent, Fisher told the Telegraph newspaper: ‘We hope people are aware that interest rates at some point will go up again and that they will head back to a normalised position.’

This would be ‘around’ five per cent.

The central bank’s executive director of markets, added: ‘What we need to do is to trigger the mindset in people that that’s where rates will eventually go back to.’

His comments surfaced one day after the Bank published the minutes from its most recent December MPC rate-setting meeting.

Seven members out of the nine-strong MPC voted in favour of maintaining rates, and against pumping more cash into the economy, at the meeting on December 8-9.

But one member, Andrew Sentance, appealed again for a quarter-point hike in interest rates to 0.75 per cent to calm inflation, while Adam Posen repeated his call for the Bank to inject more money into the economy.

Meanwhile, the slump continues to grip the UK.

The service sector, which accounts for about three quarters of the UK economy, shrank in October, official figures out yesterday showed.

The Office for National Statistics reported: ‘Output from the service sector fell 0.4 per cent between September and October.

‘The largest contribution to the decrease was government and other services which fell by 0.7 per cent.’

Howard Archer, chief UK and European economist at IHS Global Insight, said: ‘This is worrying news for the economy’s performance in the fourth quarter, although it needs to be borne in mind that the services data tend to be highly volatile from month to month and subject to major revisions.’

Elsewhere, British Bankers’ Association (BBA) figures published yesterday showed mortgage approvals for house purchases sank to a 20-month low in November, while net mortgage lending was just £1.5bn – the lowest level since August 1999.

Just 29,991 mortgages were approved compared to 30,689 in October and a three-year peak of 45,740 in December last year.

The November mortgage approval data represents a 31.7 per cent year-on-year drop and is about half the average monthly level of 58,513 seen since 1997.

Separately, the Council of Mortgage Lenders said in a statement: ‘Gross mortgage lending in November was an estimated £11.1 billion. This represents a five per cent drop from £11.6 billion in October.’

The CML added: ‘As the lowest November total since 2000 (£10.9 billion), this is the fifth consecutive month where gross mortgage lending has been at its weakest since the equivalent month in 2000.’