British interest rates hit a 6-year high of 5.5 percent on Thursday and could rise further still as the Bank of England tries to rein in inflation, at its highest level in more than a decade.
The Bank of England raised interest rates to a six-year high of 5.5 percent on Thursday as it voiced concern that diminishing spare capacity in the UK economy and greater pricing power skewed inflation risks to the upside.
All 61 analysts polled by Reuters had predicted the move, which takes borrowing costs to their highest level since May 2001. But financial markets reacted strongly initially, only for prices to move back to where they were minutes afterwards. "The risks to the outlook for inflation in the medium term consequently remain tilted to the upside," the central bank said as it explained the hike.
The widely expected quarter-point hike took borrowing costs in Britain higher than in any other country in the Group of Seven rich nations'' club. US rates stayed at 5.25 percent this week. So too did the European Central Bank''s, at 3.75 percent.
Investors are betting the BoE''s Monetary Policy Committee, 10 years old this week, will hike again before too long and maybe even as soon as next month.
The economy is running at full pelt, house prices are soaring, inflation is way above the BoE''s 2 percent target and businesses are feeling plucky enough to ratchet up prices.
Economists are less convinced than money markets about the need for further tightening. A Reuters poll taken after the rate hike showed 21 of 62 analysts expect a further increase in rates this year. Explaining its move - the fourth hike since August - the BoE said inflation would probably fall back this year thanks to lower energy bills but capacity constraints meant risks were on the upside further out.
"I would not be surprised if today''s interest rate rise to 5.5 percent is followed by another increase next month," said Roger Bootle, economic adviser to Deloitte. "What''s more, interest rates may eventually need to rise to 6 percent, or even higher."
House prices are roaring ahead, seemingly oblivious to a clutch of rates rises since August. But many Britons are feeling the pinch and this could reduce their spending in the coming months. Borrowing costs are a full percentage point higher since last summer and two full points higher than the 48-year low of 3.5 percent hit in 2003.
More than 30,000 people, a record, had to declare themselves insolvent in the first three months of 2006. Home repossession orders have gone up as more and more Britons buckle under the weight of a trillion pounds of debt.
BoE policymakers have said that so far this is a social problem but higher borrowing costs could spell bad news for finance minister Gordon Brown who looks certain to become prime minister after Tony Blair said he would step down on June 27. The Bank of England will publish its new forecasts for inflation and growth next week and official inflation figures for April will be released.
Comments
Comments are closed.