Warning signals over interest rates

MONEY markets are signalling higher interest rates ahead of this week's meeting of the Bank of England's Monetary Policy Committee.

They are betting on a quarter-point rise by the middle of the year that will add £200 to the average annual mortgage bill and put £5 on the cost of a £2,000 overdraft.

A rate rise, seen as remote at the end of last year, seems more likely after it emerged that one MPC member voted for an increase in February.

Bumper lending figures for January, released last week, further fuelled speculation that the next move in borrowing costs will be up rather than down.

Money markets are pricing in a rise by the summer. 'Market rates since September 2004 make a perfect v-shape,' said Peter Dixon, economist at Commerzbank. 'Back then, they expected a rise. Between November and January they were betting on a cut and now the odds are again on an increase.'

Lending to individuals increased by £9.45bn in January, following a December rise of £8.45bn. Over the course of a year, that would mean borrowing increasing by more than £113bn.

But as the MPC prepared for its March meeting, the reliability of the figures was being questioned.

Dhaval Joshi, economist at investment bank SG, said: 'The seasonally adjusted numbers are up, but the unadjusted figures show a fall.'

The seasonal adjustment takes account of the number of weekends and working days from one month to the next. But, said Joshi, that cannot explain the huge difference between a £1bn rise and a £960m fall.

Dixon said: 'I would suggest January was a rogue number and the figure will be down in February.'

Joshi added that, even if the next move were to be up, 'I don't think rates would need to go much above 5% to bring down the rate of increase of consumer borrowing'.

Last month's meeting was the first at which an MPC member - Paul Tucker - had broken ranks since the base rate was raised to 4.75% last August.