The Bank of England today will probably raise its main interest rate a quarter point to the highest in 3 1/2 years to keep inflation in check as economic growth picks up and house prices surge, a survey of economists showed. All but two of 44 economists surveyed by Bloomberg on Friday forecast a quarter-percentage-point increase to 4.25 percent, following rises of the same size in November and February. Two economists expected no change. ``House-price inflation is gathering pace, growth is strong, mortgage lending is at record levels, retail sales are rising,'' said Brian Hilliard, a former Bank of England economist now director of economic research at Societe Generale SA. ``The bank has got to do something.''
Central Bank Governor Mervyn King said in February the bank will raise rates ``gradually'' as economic growth strengthens. With unemployment at a 28-year low, consumers have borrowed record amounts to fuel spending. Manufacturing, too, is showing signs of pulling out of a slump. House prices in April rose the fastest in 10 months, defying the bank's prediction of a slowdown. The economists in the Bloomberg survey predict Europe's second-largest economy will expand 3.1 percent this year, above the 2.5 percent pace the Bank of England says is compatible with stable inflation. The bank in February forecast growth of about 3.4 percent this year and 3 percent next. It will release new forecasts next Wednesday.
Inflation Prospects
While the bank in February predicted inflation will accelerate to its 2 percent target in 2006, the rate has remained below that level since May 1998 and fell to a nine-month low of 1.1 percent in March. Policy maker Marian Bell said last week the bank has ``to be looking at the prospects for inflation, not the current rate.'' The U.K. central bank will announce its rate decision at noon, followed by the European Central Bank 45 minutes later. The ECB will leave its main rate at 2 percent, all 34 economists surveyed by Bloomberg predict. Futures markets suggest U.K. rates will rise again by the end of the year. The yield on U.K. interest rate futures maturing in December was 4.88 percent at 7:25 a.m. compared with the current money market rate of 4.44 percent. The U.S. Federal Reserve has left its benchmark lending rate at a 45-year low of 1 percent since its last reduction in June. The Bank of Japan has a policy of zero interest rates. The ECB, which has left borrowing costs unchanged since last June, has resisted calls from politicians such as German Chancellor Gerhard Schroeder to cut rates as the euro region's recovery falters.
`Rosy Outlook'
Britain's economy expanded 2.2 percent last year, the most since 2000. That compares with 0.4 percent growth in the dozen- nation euro area, where Germany's economy shrank. Growth touched 3.1 percent in the U.S. and 2.7 percent in Japan. ``U.K. monetary policy remains highly stimulative given the rosy growth outlook,'' said Ian Stewart, chief U.K. economist at Merrill Lynch & Co. in London, who expects rates to peak at 5.25 percent in 2005. ``Manufacturing indicators have strengthened appreciably and consumer activity remains buoyant.''
U.K. manufacturing activity accelerated in April from the previous month, the Chartered Institute of Purchasing & Supply said this week. Factory orders rose at their quickest pace since April 1995 during the first quarter, according to the Confederation of British Industry. British consumers' borrowing and spending, underpinned by soaring home prices, has picked up steam even after the central bank raised rates twice. March mortgage lending rose the most since October and credit card lending posted its biggest gain in two years, Bank of England figures showed this week.
Too Much Debt
Consumers borrowed a record 16.2 billion pounds ($30 billion) against the value of their homes in the fourth quarter. Deputy Governor Andrew Large has said he is concerned Britons are taking on too much debt. Large, who's in charge of financial stability at the bank, voted to boost rates at six out of the last seven meetings. Richard Lambert, another policy maker, last month identified a possible housing slump as the biggest risk to the U.K. economy. U.K. house prices climbed 2.1 percent in April from the month before and 18.9 percent from a year ago, the highest annual rate in 10 months, according to Nationwide Building Society. The average cost of a home climbed to 145,918 pounds, Nationwide said. HBOS Plc said yesterday prices in the three months through April grew 19.1 percent, the fastest annual rate since August.
Prices grew 15 percent last year and 25 percent in 2002, the most since the last housing boom in 1989, according to HBOS. Since 2002, the central bank has forecast house-price inflation will ease to zero by the end of its two-year forecast period.
Redirecting Attention
Next week's quarterly inflation report, which will contain the Bank of England's latest forecasts, may ``redirect attention back to the inflation forecast as the driver of rate increases,'' said Malcolm Barr, an economist at J.P. Morgan Chase & Co. Recent remarks from policy makers ``suggest some irritation with the fact that the 'we are not targeting house prices' message has apparently not been understood by all.'' Rate-setters Bell and Kate Barker reiterated that while house prices feed into the central bank's inflation projection, it doesn't target asset prices. Barker said last week house prices may fall at some point though a collapse is less likely. She said the risk of a housing market crash isn't so ``critical'' that it should dominate all policy considerations.
For now, consumers are in good shape to shoulder the costs of paying off their debts. Employment climbed to a record 28.33 million between December and February, while wages grew at their quickest pace since 2001. ///www.bloomberg.com