Inflation fear sends mortgage rates to 8 month high

NEW YORK (Reuters) - U.S. fixed mortgage rates surged to their highest in almost eight months after central bankers jolted financial markets with concerns of accelerating inflation.

The average rate on a 30-year mortgage jumped to 6.32 percent for the week ending Thursday, up from 6.09 percent last week and the highest since October.

The increase in rates came after Federal Reserve and European Central Bank officials stressed inflation is a bigger problem for global economies than slow growth. James Bullard, president of the St. Louis Fed, kept the theme alive on Wednesday, telling reporters that the central bank must deal with "inflationary consequences" of low rates.

"Mortgage rates jumped this week after a number of Federal Reserve officials, most notably Chairman (Ben) Bernanke, and Vice Chair (Donald) Kohn, expressed concern over a threat of inflation," Frank Nothaft, Freddie Mac's chief economist, said in a statement.

Investors are demanding higher yields on longer-term investments, such as mortgage-backed securities, whose returns would be eroded by faster inflation. Lenders that sell home loans into MBS programs of Freddie Mac and Fannie Mae respond by raising rates to consumers.

Higher costs on fixed-rate mortgages, which currently comprise the majority of home loans, could worsen the steepest downturn in the U.S. housing market since the 1930s by further reducing credit. Many potential home buyers have already been unable to obtain a mortgage as banks have tightened lending standards during the last year.

The rise of nearly a quarter-percentage point would increase the cost of a $250,000 loan by about $450 a year.

Sliding prices on homes may be offsetting the rise in interest rates, however. Pending sales of existing homes rose in April to a six-month high as foreclosed properties flooded the market and drove prices lower, the National Association of Realtors said earlier this week.

(Editing by Tom Hals)