BoE lifts interest rates as house prices soar

British interest rates rose a quarter-point on Thursday for the third time since November to 4.25 percent as the Bank of England tries to keep inflation in check in the face of soaring house prices and consumer spending.
Economists said more hikes were on the horizon even though the central bank noted that inflation, now running at just 1.1 percent, would probably stay below its 2.0 percent target in the near-term.
"They're worried about inflation pressures down the road so their inflation hackles are up and they're not going to stop tightening until they're pretty sure two percent is not going to be breached," said David Brown, economist at Bear Stearns.
The European Central Bank left its key interest rate unchanged at 2.0 percent shortly after the BoE decision but it too warned inflation was in danger of picking up, particularly as oil prices were heading toward $40 a barrel.
Futures markets are predicting British rates will rise at least another half percentage point by the end of the year. A Reuters poll after the announcement found 24 out of 34 economists expected another quarter-point hike in August.
Explaining its widely-expected decision, the BoE said British economic output was growing strongly and expected to accelerate, and this would lead to inflation picking up as the small amount of spare capacity in the economy was used up.
"Retail spending continues to be robust, underpinned by income growth and unexpectedly strong house price inflation," the BoE said, adding that pay was rising fast and commodity prices were surging.
The pound rose against the dollar and the euro, while government bonds and interest rate futures fell as dealers hoping for no change in rates cleared out their positions.
The FTSE-100 index of leading shares showed little reaction.
Several banks also raised their base rates by a quarter-point to 4.25 percent. Banks use their base rate as the starting point for pricing loans to businesses and other big borrowers.
The latest hike takes British borrowing costs even further above levels of the euro zone and the United States. US rates are just 1.0 percent but the Federal Reserve signalled this week that it may be ready to start raising rates again soon.
Several members of the BoE's nine-strong Monetary Policy Committee have said in recent weeks they are not targeting house prices. But analysts suspect policymakers want to take the froth out of a housing market that has been booming since the late 1990s.
Britain's biggest mortgage lender, the Halifax, said house prices surged nearly two percent in April, even though the BoE had already raised rates by a total of half a point since November.