Bank chief's fears over sixth rate rise

It has risen five times in 12 months and a sixth increase would lead to crippling interest rates for millions.

An extra quarter point to 6 per cent is now expected in the autumn, adding to a sharp rise in personal debt problems and repossessions.

Bank governor Mervyn King warned family finances are "vulnerable" because personal debt is at an unprecedented £1.3 trillion.

Spending growth may be restricted for as much as a decade as young borrowers struggle with huge loans on costly houses, Mr King said.

But rising oil and food prices pose such an inflationary threat that the bank may have to pile force further hikes.

The cumulative effect of the increases so far means someone with a typical £125,000 mortgage is paying up to £130 a month more than a year ago.

The higher rates, coupled with high property prices, have already priced many first-time buyers out of the market.

Others have huge mortgages and cannot afford to pay more.

Yet the bank is determined to use interest rate rises to turn the screw on families, taking money from their pockets to slow consumer spending.

It believes removing this spending power will make it harder for high street stores and other retailers to raise prices, so reducing inflation.

The Bank's Monetary Policy Committee has to set interest rate policy to ensure inflation is in line with the Government's target of 2 per cent.

The Consumer Prices Index measure of inflation hit 3.1 per cent in March, its highest figure for a decade. It has since fallen back to 2.4 per cent.

The inflation rate has been driven up by the rising cost of essentials such as heat, lighting and food, particularly vegetables, milk and meat.

There could be high "volatility"in food prices following the floods last month, the bank warned.

Its quarterly Inflation Report yesterday indicated rates will need to rise again to pull the inflation rate back to two per cent.

Most City experts believe rates will go up within weeks.

But a rise is not a foregone conclusion for Mr King, who admitted there is greater-than-usual uncertainty about the outlook for inflation.

The bank is expecting a sharp slowdown in the economy over the coming year as the effects of earlier rate hikes continue to feed through.

Britain's debt binge has left the outlook uncertain. The report said: "The capacity of households to service their growing stocks of debt poses perhaps the biggest risk to the outlook for domestic demand.

Oliver Gilmartin, senior economist at the Royal Institution of Chartered Surveyors (RICS), said: "Today's inflation report will not be well received by many homeowners fearing further rate hikes into 2008.

"The recent pick-up in repossessions is set to continue into 2008 with more misery for those unable to meet rising borrowing costs. The repossession rate of 77 houses a day could well enter triple digits."

Economist Howard Archer, of Global Insight, said: "Rates are more likely than not to rise to six per cent in the autumn."

Mortgage lenders last week revealed a 30-per-cent jump in repossessions during the first six months of this year. Some 14,000 people lost their homes after falling into arrears.

The number of people going bust in the first six months hit 63,263, up by more than 2,800 on the same period last year.