The money markets expect it to happen next month (July) or in August, as the Bank of England prepares to control inflation. A further rise in the autumn is possible.
Bank of England governor Mervyn King says the crucial question is where inflation is likely to be once energy prices have settled down.
The bank expects home-heating price inflation to fall sharply over the rest of this year, and in a report forecasts inflation to be down to 2% by 2009.
But in its quarterly report, the bank warns that inflation remains “a medium-term risk”, and this has triggered concerns that a base rise from 5.5% will be necessary. A further 0.25% increase is widely expected.
Figures released by the Office for National Statistics showed growth in the consumer prices index (CPI) slowed to 2.8% in April, compared with 3.1% in March.
Doug Moody, director of DaimlerChrysler Financial Services, and chairman of the Finance and Leasing Association motor finance division, says: “Curbing inflation has to be a top priority, but the uncertainty is damaging to the retail car market.
“Customers can counter the trend by choosing fixed-rate loans on new cars. For dealers, the increases mean more expensive borrowing for stock.”
Mark Squires, chief executive of Benfield Motor Group, says: “Another rate rise, with its consequential effect on disposable income, is obviously going to contribute to a continuing flatness in the retail market.
“But we are seeing reducing change cycles with many customers, which is working in the opposite direction to support retail demand. Maybe this is a reflection that the market recognises what great value they are receiving, giving customers greater confidence to change.”
Keith Parry, head of the motor retail group at Barclays business banking, said interest rates were the chosen tool to control inflation, and the money markets expected another increase.
Another business bank executive said: “A rise seems unlikely at this month’s Bank of England committee meeting, following May’s increase, which makes July or August the most likely time.
“The bank is assessing whether consumers have got the message, and are lowering their borrowing.”