The Council of Mortgage Lenders (CML) is crying foul over weekend reports that it believes interest rates should double in order to prevent a house price crash. In an analysis of the housing and mortgage markets, the council had appeared to suggest a sudden sharp increase in rates to push house price growth down into single digits “in the short term”. After a predictable weekend outcry, it yesterday released the analysis with the offending paragraph “redrafted” to state baldly that a doubling of interest rates was “neither likely nor desirable”.

It was cack-handed at best for the CML to allow even the impression that it was either calling for or predicting a doubling of interest rates in the short term. That is not, thankfully, the way that the Bank of England, preferring modest rises and thoughtful analysis, operates. As the more balanced thinking within the CML report states, such incremental increases, of which there have been three in the past six months, have been absorbed easily by borrowers. In fact, the council forecasts interest rates to rise to around 5.25 per cent by the end of the year and to end 2005 only slightly higher at 5.5 per cent.

If homeowners were alarmed by the weekend stories, ministers were horrified. Interest rates are set to become part of the general election battleground. With rates universally expected to increase over the next year, homeowners may find themselves hit in the pocket as polling day looms. Ministers are acutely aware that interest rate rises are a direct hit on voters. Unlike tax or national insurance increases, which can be deftly disguised, they are not anticipated for a year in advance and they show up clearly on bank statements. Research has shown that people tend to overestimate the effect of tax increases, so that when they occur, they do less damage than expected. Interest rate rises are more lacerating: increased mortgage repayments are immediately apparent on bank statements. Lenders also write to all borrowers, kindly spelling out the details of the rise.

Base rates currently stand at 4.25 per cent. They have risen three times, by a total of three quarters of a percentage point, since the Bank of England’s Monetary Policy Committee (MPC) started tightening the screws last November. If, as the CML predicts, they end the year at around 5.25 per cent, that will represent an increase of 1.75 per cent in a little over a year, adding £109 a month to the cost of a typical £100,000 mortgage. Ministerial jitters over careless talk of doubling rates is understandable.

For more than ten years under the last Conservative Government, psephologists at Essex University accurately predicted election outcomes two years in advance using models based on expected interest rate movements and their effect on consumer confidence and thence voting patterns. The system collapsed when Gordon Brown handed control of interest rates to the Monetary Policy Committee, as politicians could no longer manipulate interest rates to suit the political agenda.

The Chancellor failed to use fiscal measures to dampen the housing market in the March Budget, and it has remained buoyant. At its last meeting, this month, the MPC deliberated over whether to raise base rates by 50 basis points instead of just 25. Next month it may just go the whole half- hog. This, and subsequent small increases, need not lead to borrower panic and a crisis in the housing market. Those are more likely to be fuelled by the sort of over-estimate thrown out so carelessly by the CML and seconded by horror headlines in scare-mongering tabloids. Fear is always a hot property.

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