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British homeowners brace as talk turns to BOE rate increase

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Melissa Hellio, who borrowed almost £200,000 (S$361,000) to buy a three-bedroom house in Wales with her partner, says she is frightened at the prospect of rising interest rates.

[LONDON] Melissa Hellio, who borrowed almost £200,000 (S$361,000) to buy a three-bedroom house in Wales with her partner, says she is frightened at the prospect of rising interest rates.

"We're at the mercy of the Bank of England," said Ms Hellio, 26, who paid £220,000 for the end-of-terrace property in Cardiff with some financial help from her parents.

When BOE policy makers lowered their benchmark interest rate to a record-low 0.25 per cent four months ago a further cut appeared probable but the precipitous decline in sterling since the Brexit vote has changed everything.  As soaring import costs threaten to push inflation above their 2 per cent target next year, officials are signaling there are limits to their tolerance. The majority of economists surveyed this month say the next move in rates will be up. While almost none see the BOE taking action anytime soon, households are less optimistic. A survey for the central bank in November found more than 40 percent predicted an increase within 12 months.

The fear of rising interest rates could weigh on consumer spending and the housing market at a time when wages are coming under growing pressure from the pickup in inflation.  Financial conditions are already tightening, raising the prospect of dearer home loans even if the BOE does nothing. Sterling swap rates, used by banks to price mortgages, have been rising since September and are now at their highest since Britons voted to leave the European Union in June.  "The fall in mortgage rates we've seen since the Brexit referendum is likely to be reversed over the next three months," said Samuel Tombs, chief UK economist at Pantheon Macroeconomics in London. "Markets have started to expect faster tightening in US monetary policy and that's pushed up expectations for U.K. rates." HSBC Holdings Plc recently scrapped its 0.99 per cent two-year fixed rate mortgage because funding costs have risen in the last month. Its cheapest two-year fixed rate mortgage is now 1.29 per cent and industry experts expect other lenders to follow.

Market voices on:

"Fixed rates are going to start on an upward trajectory," said David Hollingworth, a spokesman at broker London & Country Mortgages. "We've hit the rock bottom and more elevated funding costs will have to start feeding through." The Financial Conduct Authority said on Monday it is looking into whether competition in the sector can be improved to benefit consumers. In a consultation this year, it found that consumers "face challenges in making effective choices" regarding mortgages.

The pound has fallen 15 per cent since the Brexit vote and official figures Tuesday showed annual inflation accelerated to 1.2 per cent in November, the fastest pace in more than two years. In a sign of the shift in market sentiment, futures contracts are now pricing in a greater probability of a rate increase than a decrease from June 2017.

Stephen Boyle, 29, has protected against rising rates by borrowing less than he could have done for the 375,000-pound flat he shares with his wife in Greenwich, London.

"I don't anticipate it happening within the next three years, but economic prediction is a mug's game," the business architect said. "The macro economy is fundamentally unpredictable in my view."