Will it be a happy New Year for mortgage holders?

As the Bank of England Monetary Policy Committee (MPC) meets later this week, many mortgage customers will be counting the cost of Christmas and wondering what will happen to their mortgage payments.

At the last meeting in December 2006, the MPC voted unanimously to keep Base Rate at 5.00%, but following bullish figures from high street retailers, will we see an increase this week?

The MPC can only increase Base Rate to control inflation and not, as some people may think, to cool the housing market, as house prices are not included in the basket of goods that make up the Consumer Price Index. However, buoyant house prices have an indirect impact on inflation, as homeowners feel wealthier and, as a result, spend more money creating greater demand, which subsequently forces the price of goods to increase.

Paul Riley, Head of Group Treasury at Leeds Building Society said, "Any increase in Base Rate has a direct impact on disposable income, as the cost of variable rate mortgages, personal loans and credit cards will increase. This will reduce spending and control inflation but not immediately. We still need to see the full impact of the two previous Base Rate increases in August and November last year."

Forward interest rates in the market are not expecting an increase this week, with only an 18%1 chance of a 0.25% increase. The picture changes dramatically for next month, with the markets indicating that there is an 81% chance of a 0.25% increase.

Paul Riley continued "The market expects an increase in February, which is also when the MPC will have the Quarterly Inflation Report, although there is a small chance that we could see an increase this week."