The jump in inflation to 3.1% in March has caused markets to reappraise the outlook for interest rates, says the Council of Mortgage Lenders.

Their market commentary showed a 0.25% rise in the official bank rate to 5.5% at next month’s monetary policy committee meeting is considered a virtual certainty. And the markets are pricing in a further rise to 5.75% during the summer. A number of lower-priced fixed rate mortgage deals have been withdrawn as market rates along the yield curve have risen.

Inflation of 3.1% was only a little above the February inflation report forecast that it would end the first quarter at 2.9%. Inflation is still expected to fall sharply as factors which have pushed it up such as food and furniture prices decrease as announced reductions in utility prices take effect. Inflation could fall back to 2% within a matter of months. The inflation report published on 16 May will give the bank’s updated assessment of the medium term risks.

The rise in interest rates over the past 10 months is having an effect on those trying to get onto the property ladder. Following a small increase last year, the number of first time buyer loans was down 3% in the first two months of 2007 compared with a year earlier. First time buyers had to spend an average of 18% of their income to meet mortgage interest payments in February, up from 16% a year earlier and the highest level since the early 1990s. However, the number of loans to home movers was up by 9% in the first two months of the year compared with the same period in 2006.

Paul Samter, economist for CML, said: “Despite the headwinds, lending volumes have remained strong this year. Gross lending in the first quarter was 13% stronger than a year earlier, with lending in March at an all time record in seasonably adjusted terms. Net lending was 14% higher than a year earlier. This strength looks set to continue into the spring in view of March’s loan approvals figures, which were substantially higher than in any previous month.”