The Bank of England probably will today increase its benchmark interest rate to 4.75 percent, the highest in almost three years, to curb record consumer borrowing and head off accelerating inflation, a survey of economists showed. The Monetary Policy Committee will raise its main lending rate by a quarter-point for a fifth time since November at noon in London, all 41 economists polled by Bloomberg said. The Frankfurt- based European Central Bank is expected to leave its benchmark rate at 2 percent 45 minutes later. Household debt exceeded 1 trillion pounds ($1.8 trillion) for the first time in June, fueling a surge in spending that pushed second-quarter economic growth to the fastest in almost four years. With house prices rising 22 percent a year, Bank of England Chief Economist Charles Bean said last week that raising rates ``earlier rather than later'' may ensure a more stable economy.
``Mortgages, inflation and just about everything else'' point to a rate increase, said Danny Gabay, a former Bank of England economist now at Fathom Financial, a London-based consultancy. ``There's no spare capacity in the economy.'' Europe's second-largest economy has grown for 48 consecutive quarters, pushing unemployment to a 29-year low of 2.7 percent and fueling a 4.2 percent gain in average earnings, excluding bonuses, in the quarter through May, the fastest pace in two years. The economy expanded an annual 3.7 percent in the second quarter, above the 2.5 percent rate the central bank associates with stable inflation. Retail sales jumped 1.1 percent in June, almost three times as much as economists expected. Manufacturing is also rebounding from a decline in the first quarter.
Applying the Brakes
Borrowing costs in Britain are more than three times the level of the U.S. and twice as high as Canada. The Bank of England was the first of the four major central banks to increase rates since 2001. The Japanese central bank has a policy of zero rates. The ECB will keep its benchmark rate unchanged for a 13th month at today's meeting, all 33 economists polled by Bloomberg predicted. The euro region's economy grew at less than half the pace of the U.K. in the first three months, with unemployment of 9 percent holding back consumer spending. Surging demand for credit has boosted earnings at the U.K.'s largest banks. Royal Bank of Scotland Group Plc, the second- largest by assets, said on Tuesday that first-half profit rose 21 percent, bolstered by earnings from its main corporate lending and consumer banking businesses. On Monday, HSBC Holdings Plc, Britain's No. 1 bank, posted its biggest first-half profit ever.
Boon for Banks
Faced with buoyant growth and July house-price inflation of 22 percent, as measured by HBOS Plc, both the National Institute of Economic and Social Research and the Economist newspaper last Friday urged the central bank to lift rates by a half percentage point. The bank hasn't raised rates by a half point since achieving independence in May 1997. Bean indicated last week the bank won't make such a big move, saying the central bank is ``not in the business of trying to clobber the consumer.'' The Confederation of British Industry, the nation's biggest business lobby group, said Monday that a half- point increase would be ``a real blow'' to business. Futures markets suggest investors anticipate more U.K. rate increases. The yield on the interest rate contract maturing in March was at 5.38 percent as of 5:30 p.m. in London yesterday. That compares with the current money market rate of 4.94 percent.
Inflation Outlook
Economists expect rates to peak at 5.25 percent, according to the median of 31 forecasters surveyed by Bloomberg on Friday. The U.K. benchmark rate has averaged 8 percent over the past 20 years and 5.5 percent over the past 10. ``There's no chance of anything other than a 25 basis point rise,'' said Rob Carnell, senior international economist at Commonwealth Bank of Australia in London. ``The sensible move is gradually to tweak rates a bit higher.'' While consumer-price inflation is accelerating, reaching 1.6 percent in June from 1.5 percent the previous month, it remains below the Bank of England's target rate of 2 percent. The bank forecast in May that consumer-price growth will exceed 2 percent in two years. It will publish its new quarterly growth and inflation forecasts next Wednesday.
There are some signs that higher interest rates are beginning to bite. A drop in home-loan approvals to 114,000 in June, the lowest since July 2003, according to Bank of England figures, may point to a slowing in demand for credit in months ahead. Retail sales growth slowed in July as shops ended promotions for the European soccer championships and consumers reacted to higher borrowing costs, a CBI survey showed this week. Service industries expanded last month at the slowest pace in more than a year, a survey of purchasing managers showed yesterday. ``We do think that in the last quarter of the year at least there will be strong evidence of a housing slowdown in place and that's going to be enough, perhaps, for the BOE to pause in the tightening process,'' said Ray Attrill, a director at 4Cast Ltd., a London-based economic analysis company. ///www.bloomberg.com