The Bank of England Base rate of interest for loans and savings has now remained at a historically low level for almost one year.

With the base rate still at just 0.5 per cent, those people who have chosen a variable or tracker rate for their home owner loan, or other personal loan, have seen their monthly repayment amounts fall significantly, in many cases helping them through the difficult times of the past twelve months.

But in December last year, the rate of inflation rose dramatically to reach 2.9 per cent (0.9 per cent above the Government target), thereby leading to fears that this could cause the Monetary Policy Committee (MPC) to increase interest rates to compensate for this rise.

But one economist has warned that increasing interest rates will have little effect on the rate of inflation and could actually be detrimental to those individuals with a variable rate loan, or for those looking for a new loan, with the possibility of pushing the UK back into recession just when we are starting to see some signs of recovery.

Charles Davis of the Centre for Economics and Business research (CEBR) commented that the recent increase in the Consumer Prices Index (CPI) was only a short term phenomenon which has been caused by factors such as the recent increase in the rate of VAT and the Bank of England should not take panic action against the increase.

Mr Davis thought that it was possible for the rate of inflation to increase above three per cent, although this should not be a cause for concern in the present circumstances. He said “That will cause Bank of England Governor Mervyn King to have to write to the Chancellor, but we really feel that this is a short term phenomenon.”

Many borrowers in the UK will be hoping for continued low interest rates, as an increase in the cost of their home owner loan could cause financial difficulties for many.