Britain raises rates to cool roaring economy
August 6, 2004
London - The Bank of England raised interest rates by 25 basis points to 4.75 percent yesterday, the fifth such hike since November, in an expected move aimed at cooling a roaring economy.
The bank said though it expected inflation to fall in the near term, underlying cost pressures have risen and a hike was needed this month to keep inflation on track to meet its 2 percent target.
Economists said further interest rate hikes were still likely and futures markets were predicting borrowing costs rising above 5 percent by the end of the year.
"With demand already high relative to the supply capacity of the economy, continued strong growth is likely to lead to inflationary pressures," the bank said.
It noted that business surveys pointed to continued expansion and that the housing market was still buoyant, though there were now signs that it might be starting to ease. Consumer spending might also be moderating.
The pound fell against both the dollar and the euro while government bonds and short sterling interest rate futures rose on relief that the bank did not increase interest rates by 50 basis points as some had thought possible.
With the economy growing above trend and house prices still rising fast, many analysts are predicting the monetary policy committee (MPC) could hike rates again next month. It raised rates in May and in June.
"We are going to need to see housing and consumption moderate much more quickly to prevent a further rate hike," said James Knightley, an economist at ING.
All but one of 45 economists polled last week had predicted a quarter-point hike but there had been some outside talk of a bigger move after a run of strong data.
The decision to raise interest rates was well sign-posted. The MPC's July minutes showed they kept rates steady last month partly because they feared a third successive 25 basis point hike would alarm financial markets.
Since then, there have been increasing evidence of inflationary pressures building in many sectors of the economy.
Annual house price increases are firmly in double-digit percentages and consumers are borrowing at a record pace. And despite talk of consumers tightening their belts, retail sales surged 1.1 percent in June.
These data suggest the previous four rate hikes, which had brought cost of borrowing up by 100 basis points, had done little to restrain consumption.
At this meeting, the MPC also had before it the bank's new forecasts for growth and inflation, which will form the basis of next week's inflation report.
Britain's manufacturing industries saw output fall by 0.7 percent in June from May, the biggest decline for almost two years, official figures showed yesterday.
The fall reversed three consecutive monthly increases and was the steepest fall since October 2002, the National Statistics office said. Manufacturing output strengthened by 1.2 percent in June from the same month of 2003. Economists had predicted monthly growth of 0.2 percent and a year-on-year rise of 2 percent.
British manufacturers, struggling to recover from several tough years due to a strong pound, a global economic slowdown and stiff competition from low-cost producers, had been bracing themselves yesterday for a fifth quarter-point hike in British interest rates announced yesterday.
The fall in manufacturing output was led by a 3.2 percent decline in the basic metal and metal products industry, and a 1.4 percent fall in the transport equipment sector. - Reuters and AFP.
|
|
