LONDON, Feb 5 - The Bank of England raised interest rates by a quarter percentage point on Thursday for the second time in three months after its first warning shot in November did little to cool the steamy British economy. Analysts had been almost unanimous in expecting the hike, which took the Bank's key repo rate to 4.0 percent, as recent data pointed to the economy growing above its sustainable rate, retail sales sizzling and business confidence improving. The BoE said in a statement accompanying its decision it was still worried about the continued strength of the housing market and consumer debt levels. "Although sterling has appreciated, continued growth above trend means that inflationary pressures are likely to pick up gradually over the next couple of years," it added. It also said the global economic recovery had become more even and growth in the second half of last year was "above trend" in Britain while business surveys pointed to a further pickup.
Financial markets see the rise as one of a series this year as the Bank moves to choke off inflationary pressures. They see the repo rate up to 4.75 percent by the end of 2004. The pound rose against both the dollar and the euro while government bonds fell back as traders who had bet on the Bank doing nothing sold out of their positions. The hike will be a boon for savers but a bane for mortgage borrowers who will see their monthly payment rising by around 14 pounds a month on a typical 100,000 pound home loan. Several major banks immediately followed the MPC's move, hiking mortgage rates but there was no immediate news about savings rates.
Some business groups were not pleased with the move, arguing the rate rise was premature and would stifle their recovery. "The MPC's decision is very disappointing. This rise is premature and is likely to hit recovery over the head before it gains momentum," said David Frost, Director General of the British Chambers of Commerce. Some economists had argued that one factor that could have delayed a rate hike this month was the weak dollar, which hit an 11-year low against sterling last month. The pound has been relatively steady on a trade-weighted basis but policymakers expressed concerns last month that the strength of the euro against the dollar might derail economic recovery in the euro zone -- Britain's biggest trade partner. But the rate increase on Thursday seemed to suggest that the currency concerns were superseded by worries over rising house prices and consumer debt levels. The latest hike, which brought the benchmark base rate to 4.0 percent, further widens the interest rate gap between the UK and the euro zone and the United States, whose rates stand at 2.0 percent and 1.00 percent respectively.
A MOVE WELL SIGNPOSTED
The hike is anything but a surprise as there were numerous signs that the move was coming. The message from the MPC's November Inflation Report was that, if the economy panned out as expected, a gradual rise in rates would be necessary this year. And the minutes of the MPC's January meeting revealed policymakers perceived domestic demand and growth in the world economy had already outstripped those projections. Most recent economic numbers surprised on upside, with growth at 0.9 percent in the fourth quarter, retail sales steaming along and the service sector expanding at its fastest rate in six-and-a half years. Even the hard-pressed manufacturing sector is showing signs of life//