The Bank of England kept British interest rates at 4.0 percent on Thursday, a month after raising them by a quarter-point for the second time since November, but economists said more hikes are just a matter of time. House prices and consumer demand have still shown no sign of slowing as the BoE wants, but few analysts had expected a hike so soon after the last one, given sterling's strength and uncertainty about the effect rate rises would have on debt-laden consumers. With every indicator, however, pointing to an economy powering ahead, the risk is rising that borrowing costs will go up by another quarter-point next month or in May as the Bank tries to keep a lid on inflationary pressures further out. "The only question is when, not if, interest rates will rise. Consumers and business should be aware that further interest rate rises are just around the corner," said Graeme Leach, chief economist at the Institute of Directors.
Financial markets reacted swiftly to the announcement. Gilt and interest rate futures rose and the pound fell back against the euro and dollar on relief that the central bank had not pulled the rate trigger again. Futures markets are pricing in rates a full percentage point higher in a year's time. The European Central Bank was also meeting on Thursday but its announcement at 1245 GMT, was expected to also be a "no change" though there the speculation is whether or not policymakers in Europe will cut rates in response to the strength of the euro.
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Industry groups were delighted with the BoE decision even though most have pencilled in more rate rises ahead. But they want the central bank to go slowly for fear of killing the manufacturing recovery and pushing consumer spending down too far. "Manufacturers will welcome this breathing space which will allow them to take advantage of an export-led recovery," said Dougie Peedle, deputy chief economist at the Engineering Employers' Federation. The BoE offered no explanation for its decision but minutes of the MPC's meeting will be published in a fortnight. All nine members voted for last month's rate hike and there is a good chance some members wanted to raise rates this month even though inflation currently remains well below its 2.0 percent target. There was probably a lot of discussion on just how the rise in sterling, which hit its highest level in a year against the euro this week, should be treated when it comes to setting policy. Some members feel that the strength may be just temporary and should be disregarded for the purposes of setting monetary policy unless people and companies start changing their wage and price-setting behaviour as a result. But others argue that the pound's rise will dampen growth and inflation and that reduces the need for rate hikes. The dollar's dramatic turnaround in the last few days, however, will also have allayed somewhat fears of economic recovery being derailed in the euro zone, Britain's biggest export market.///