BoE raises interest rate a fifth time to 5.75%

LONDON: The Bank of England (BoE) raised its benchmark interest rate for the fifth time in a year as accelerating economic growth and surging house prices kept inflation above target.

The nine-member Monetary Policy Committee, led by governor Mervyn King, increased the bank rate by a quarter-point to 5.75%, the highest since April 2001, the central bank said on Thursday in London. The decision was expected by 53 of 60 economists surveyed by Bloomberg News. The remainder forecast no change.

Inflation has held above the bank’s 2% target for more than a year as a boom in London’s financial services industry and rising home values powered the fastest economic growth in three years. The pound held near a 26-year high on speculation Thursday’s increase won’t be the last.

“There aren’t clear enough signs the economy has reacted to previous hikes,” said Karen Ward, an economist at HSBC Holdings, who left the central bank last year. “We may see another hike as early as September,” he added.

The central bank’s May 16 forecasts show a 5.5% rate is insufficient to tame inflation, which reached a record 3.1% in March. The bank predicts economic growth will reach 3% this year, the fastest pace since 2004.

Futures trading shows investors expect the bank’s main rate, already the highest among the Group of Seven industrialised nations (G-7), to rise to 6% by the end of the year.

“The pace of expansion of the world economy remains robust,” the bank said in a statement. “Although pay pressures remain muted, the margin of spare capacity in businesses appears limited, and most indicators of pricing pressure remain elevated. The balance of risks to the outlook for inflation in the medium term continued to lie to the upside,” it said.

The implied rate on the December futures contract remained 6.3% in afternoon trade on Thursday. The contract settles to the three-month London inter-bank offered rate for the pound, which averaged about 15 basis points more than the central bank benchmark for the past decade.

The pound, which rose as high as $2.0207 on Wednesday, rose to $2.0192 on Thursday, near the highest in 26 years. “They’re not about to jump in again and tighten in the very short term,” James Shugg, an economist at Westpac Banking, said in an interview. “We’re in for an extended pause as they assess the impact of rate rises today,” he said.

King has led the push for higher rates. Overruled in a 5-4 vote at last month’s meeting, he said June 28 that inflation risks are still “to the upside” and there is particular uncertainty about whether companies are raising prices. “If you’re going to hike rates, then you may as well get it over and done with,” said Gavin Redknap, an economist at Standard Chartered Bank in London.

An index of factory gate prices stayed close to an eight-year high in June, a report by the Chartered Institute of Purchasing and Supply and Royal Bank of Scotland Group showed July 2. DS Smith, a UK maker of paper and plastic packaging, said June 28 it raised prices after “strong” European demand.

Central banks around the world are raising rates to tackle the threat of accelerating inflation. The European Central Bank, which keept its rate at a six-year high of 4% on Thursday, may increase its benchmark by a quarter-point in September, a survey of economists showed. The US Federal Reserve said June 28 that inflation is still the “predominant” risk facing the economy.

In the UK, higher rates will add to pressure on consumers shouldering a record 1.3 trillion pounds ($2.6 trillion) of debt. Chancellor of the Exchequer Alistair Darling said in a Financial Times interview yesterday he’s concerned Britons who took out two-year fixed rate mortgages in 2005, when the bank rate dropped to 4.5 percent, will now be faced with higher repayment costs.

For consumers with variable-rate mortgages, each quarter- point rate increase adds about 30 pounds a month to repayments on an average 25-year mortgage of 200,000 pounds, according to the Council of Mortgage Lenders. Payments on a loan of that size will be about 150 pounds more each month than they were a year ago.

Any signs of slowing growth will make it harder for advocates of further rate increases to win their case in coming months. Chief Economist Charles Bean, who argued against a rate increase last month, said on June 28 that he expects inflation to slow in the second half. Rachel Lomax said the same day policy makers should be wary of ``overdoing it.’’ The Bank of England will publish minutes of this month’s meeting on July 18.

Inflation slowed to 2.5 percent last month because of falling utility bills. Consumer confidence fell in June for the first time in six months, Nationwide Building Society said yesterday.

``We can now look for an extended period with rates at this level,’’ said Redknap. ``They are very close to their peak.’’ The U.K. economy is showing few signs of losing momentum. An index of services from banking to transport unexpectedly rose last month to the highest since January, a survey by the CIPS and Royal Bank of Scotland showed yesterday.

A shortage of housing has helped drive up property prices despite higher rates. House prices increased 0.4 percent in June, said HBOS Plc, the U.K.’s biggest mortgage lender, yesterday. Nationwide said June 28 prices rose 1.1 percent in the month and 11.1 percent in the year, the fastest annual pace in more than two years.

King told lawmakers June 28 that the economy has ``so far proved resilient’’ to tighter monetary policy. ``Interest rates will have to remain restrictive for some time,’’ said Dominic White, an economist at ABN Amro Holding NV in London and a former official at the U.K. Treasury.