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Base rate back to 5% in year, predicts B&B

Bradford & Bingley head of strategy and planning Peter Charles believes the base rate could fall back to 5 per cent within a year.

Charles says there could be a further 25 basis point rise in March or April but that the economic environment could allow the base rate to return to 5 per cent by February 2008.

His comments come after it was revealed that the Bank of England’s monetary policy committee voted 5-4 in favour of raising the base rate to 5.25 per cent last month.

BoE governor Mervin King said in a speech to the Birmingham Chamber of Commerce that he expects inflation to fall from its current level of 3 per cent.

Charles says: “The 5-4 split from the MPC implies that there is slightly more confidence that inflation will come down and more concern that rising interest rates will have an impact on the economy.

“I think a rise in March or April is likely but that will quite quickly keep wage inflation at current levels which gives scope for a reduction in rates later this year. It could be down to 5 per cent by February 2008 or maybe before.”

King said: “The committee started to raise interest rates to deal with the changing balance of risks last August. By responding early to changes in the inflation outlook, the MPC ultimately needs to raise interest rates by less than would be the case if we delayed.

“Looking forward, some of the factors responsible for the pick-up in inflation through 2006 are likely to unwind during 2007. But how quickly and by how much inflation will fall over the next year or so is difficult to judge.”

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