December saw inflation rates in the UK soar by an full percentage point, up from 1.9% in November to 2.9% in December. At the end of the month of December the UK government reverted the VAT rate from the temporary reduced level of 15% back to the earlier 17.5% rate. A small rise in costs on the face of it, but over all, taking all VAT chargeable items into account, that shift together with the claims that lots of key shops quietly increased prices by more than the official rise in VAT means that it is almost undeniable that prices have gone up more still in January.

So what level will that leave the January inflation statistics showing? No doubt, no less than 3.0%, possibly well over 3.0%.

Does this mean that UK inflation figures are racing away out of control and what does it signify for the average citizen? Well, numerous large lending banks are having to put up their standard variable rate mortgage costs. Why is this the case if interest rates are stable and their lowest on record? The answer is pretty plain. The banks must attract masses of new savers and in a lot of cases they can only draw them by offering decent savings interest rates. Savers prudently investing in accounts paying 0.5% are losing a small fortune when the inflation figure is charging towards the 3.0% mark. In actual terms, they are really losing 2.5% of their hard generated investment by keeping their cash sheltered away in the bank.

For that reason, these vigilant savers are having to look around carefully and with promising government backed savings and newly rescued banks being able to afford to pay out higher interest rates, other banks must raise the cash to follow suit. And there is only one obvious way of doing this – raising the basic interest rates that they are charging their borrowers who have been the beneficiaries of exceptional low rates for a long time.

This hasty and unforeseen rise in the standard variable rates along with the pound’s gradually promising recovery on the critical international money markets might just be the prompt that the controlling Bank of England’s monetary policy committee may see as the basis to start to raise the base rate little by little after months of stagnation. They might want to manage expenditure whilst having to protect the wealth of savers from losing out on their valuable investments. Their only tool for controlling this would be to rise the base rate gradually.

Some observers think that the projected base rate raise must come at some point in the future and that if it is sooner rather than later, it could decrease the final pain of the interest rises. They dread that if the interest rates are not raised in the near future, then they may have to raise a lot more in later months. Only time will tell.

Keith works for on behalf of CompareMortgageRates.co.uk where you can uncover plenty articles about how to compare rates.

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