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Inflation threat to interest rates

Most analysts are convinced that the Bank of England will increase base rates on May 10, adding to the cost of dealers’ borrowings and encouraging consumers to delay car purchases.

The 5.25% rate is expected to increase to 5.5%, though some economists think 5.75% is possible to curb inflation and dampen borrowing.

Inflation is the cause for concern. Mervyn King, governor of the Bank of England, had to write an unprecedented letter to the Gordon Brown, chancellor of the exchequer, after UK consumer price inflation jumped to 3.1% in March.

Mr King, saying the bank was determined to bring inflation back to its 2% target, made particular reference to consumer spending.

The 3.1% year-on-year increase in new car registrations in March is further indication of a buoyant economy, though it was achieved through an expensive programme of manufacturers’ incentives and marketing initiatives.

Keith Parry, head of the motor retail group at Barclays Business Banking, says: “Dealers can breathe a little easier after an excellent performance in an important plate-change month but, with margins still under pressure and interest rates widely expected to rise this month, retailers will remain cautious.”

Brendan Devine, chief executive, GE Money Motor Finance, says more car sales should mean finance opportunities, but other statistics from the Bank of England underlined the need for dealers to remain competitive.

Figures released by the bank showed that more people are using property equity withdrawal – extracting cash from the value of their homes to save or spend.

The total rose to £14.6 billion, or 6.7% of taxed income, in the final quarter of 2006, higher than at any times since late 2003/early 2004.

“There is a fair chance that car purchases are being made through equity withdrawal in place of dealer or loan finance because it is assumed to be a ‘cheap’ option,” says Mr Devine.

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