Britons Must 'Learn' To Cut Spending As Interest Rates Predicted To Rise

Interest rates are set to go beyond the six per cent barrier by the end of 2007, according to a new survey.

In a study carried out by the Independent on Sunday, economists from Ernst & Young, HBOS, JP Morgan, Barclays, Royal Bank of Scotland and Merrill Lynch were reported to believe that the Bank of England's monetary policy committee (MPC) will increase the base rate by at least a quarter of a percentage point before the end of this year, which consequently could increase pressure paying back secured loans for a number of consumers. Although a number of respondents claimed that interest rates will reach a high of six per cent, a "significant number" suggested that the MPC could opt to increase the base rate past the 6.25 per cent mark.

These concerns were particularly echoed by Ernst & Young as figures from the financial services firm indicate that a greater proportion of consumers' wages are spent on tax payments. Over the course of the first three months of 2007, household tax payments were reported to have increased by 9.8 per cent - a rate which is "far ahead" of salary growth.

Peter Spencer, chief economic adviser to the firm's Item Club, said: "With warnings of yet higher interest rates and financial problems round the corner, Item expects prudence to prevail". Mr Spencer also claimed that "people simply have to learn" to limit their expenditure as soon as possible to avoid further financial pressures.

Meanwhile, first-time buyers and those with debts accrued via personal loans and credit cards are said to face a particular shortfall in their disposable income due to predicted MPC rises. The effects of higher energy bills and petrol costs were said to lead to increased pressure on Britons' personal finances.

Commenting on figures revealing that Britain's GDP is to rise by 2.9 per cent over the course of this year David Kern, economic adviser for the British Chambers of Commerce, claimed that consumers could be set to face further pressure on their finances as the Bank looks to raise the base rate further. He said: "Unfortunately the strong figures will heighten pressure for higher interest rates, at a time when the case for further tightening policy are by no means conclusive". However, Mr Kern added that as the property sector softens slightly the MPC should be "cautious", advising the committee against raising the base rate until the full effect of previous increases are felt.

Earlier this month, a study released by Legal & General revealed that the impact of five base rates rises over the last year has curbed consumers' intentions to spend. When surveyed in June, 57 per cent of Britons claimed to have money left over after making bills and debt repayments - the lowest figure noted for three years. During the same month in 2006, some 61 per cent of consumers were said to have money to spend. Meanwhile, 62 per cent of borrowers were reported to be in a mood to save last month, up from the 60 per cent recorded during 2006.

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