Base Rate to be at 1% by the Summer ? Ask Mr Bean...

Legal & General Investment Management (LGIM) has forecast that the Bank of England will increase base rate to 1% by the summer, hitting nine out of ten mortgage borrowers.

Its research suggests that far more households are now exposed to rate hikes, estimating 90% of all mortgages in the UK are variable rates, up from 60% in 2007, and well beyond the FSA's estimate of 68%. LGIM warn that consumers will experience "a meaningful impact to their cash flow" if banks choose to pass on the rate rise to borrowers.

The investment division of L&G said that the first rate rise will come in May and will likely be followed by another increase by the summer but also added that the markets are now expecting four rate hikes over this year and into 2012. 

Tim Drayson, economist at LGIM (pictured), said the MPC faced an extremely difficult task, with inflation running at double its target, but economic growth going into reverse.He said higher interest rates are needed to calm inflation, but warned that the economy is on a knife edge and could easily tip back into recession if the MPC raises rates too much, too soon.

LGIM noted that the current difference in opinion among Committee members, with a four-way split at the last meeting, is extremely rare.

A key player within the Monetary Policy Committee could be moderate Charlie Bean. Drayson said that if Bean votes for an increase in interest rates, he could well take other committee members with him.

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