Interest rates 'to rise sharply next year' as wages grow

Interest rates are expected to rise sharply next year, experts have predicted, as official figures heralded the end of the squeeze on wages.

A Treasury survey of City economists found that all now expected rates to rise, with some predicting them to more than triple to 1.75 per cent.

Higher rates could provide respite to millions of pensioners who have seen the value of their savings shrink due to the impact of inflation and rock-bottom returns. However, it will leave many families paying significantly more on mortgages and debt repayments.

David Cameron said that hundreds of thousands of people have been given the “hope of a brighter future” after official figures showed wages are going up faster than prices.

Wages rose by 1.7 per cent this February while official figures showed on Wednesday that inflation fell for the sixth month in succession to 1.6 per cent.

It came as a blow to Ed Miliband, who has repeatedly tried to blame the Coalition for a “cost of living crisis”. A number of Labour MPs appeared to criticise Mr Miliband’s economic policies on Wednesday, intensifying pressure on him before the next election.

One MP said that Mr Miliband and Ed Balls, the shadow chancellor, now need “to start articulating an alternative credible economic message”.

Employment went up by 691,000 over the past year, giving a rate of 72.6 per cent, the best in six years, the figures from the Office for National Statistics showed.

Unemployment fell by 77,000 between December and February to 2.24 million, giving a jobless rate of 6.9 per cent. It is the lowest the jobless rate has been for five years and below the Bank of England’s benchmark for when interest rates ought to rise.

The Treasury released a report on Wednesday containing economic forecasts by City experts including Santander and Citigroup. According to those forecasters, rates could double to 1 per cent or go as high as 1.75 per cent by the end of 2015. Mark Carney, the Governor of the Bank of England, has previously refused to rule out a rise in interest rates before next May’s general election. Earlier this year he said that for the Bank, the date of the election was irrelevant when it came to raising rates.

However, an increase in March or April next year, which some economists are predicting, could be a significant factor in the general election. The Bank has kept rates at 0.5 per cent to maintain an emergency stimulus to the weak economy.

Mr Cameron released a statement saying: “Employment rises to record 30.39 million – an extra 239,000 people with the security of a job and hope of a brighter future.”

George Osborne said that although many families continue to struggle, the wage figures vindicated his economic strategy.

Labour appeared divided over the party’s economic message. Mr Balls insisted there is still a “cost of living crisis” because “people are still worse off”.

Hours earlier, the labour MP Pat McFadden told the BBC that he wants his party to take “wealth creation every bit as seriously as its fair distribution”.

The Tory MP Julian Smith said Mr McFadden’s comments show that “Ed Miliband has no plan for the country and his own MPs know it”.