British interest rates hit a six-year high of 5.5 per cent on Thursday and could rise further still as the Bank of England tries to rein in inflation, at its highest level in more than a decade.
The widely expected quarter-point rise took borrowing costs in Britain higher than in the US - where rates stayed at 5.25 per cent this week - and the European Central Bank's rate, which remained at 3.75 per cent.
Investors are betting the bank's monetary policy committee, 10 years old this week, will raise rates again before too long and maybe even as soon as next month. The economy is running at full pace, house prices are soaring and inflation is above the bank's 2 per cent target.
Explaining its move - the fourth rise since August - the bank said inflation would probably fall back this year thanks to lower energy bills, but capacity constraints mean risks could rise in the long term.
"I would not be surprised if today's interest rate rise to 5.5 per cent is followed by another increase next month," said Roger Bootle, economic adviser to Deloitte. "What's more, interest rates may eventually need to rise to 6 per cent or even higher."
House prices are soaring, but many consumers are feeling the pinch and this could reduce their spending in the coming months.
Borrowing costs are a full percentage point higher since last summer and two full points higher than the 48-year low of 3.5 per cent in 2003. More than 30,000 people, a record number, had to declare themselves insolvent in the first three months of 2006. Repossession orders have gone up as more and more British homeowners struggle with debt.
The bank's policymakers said this is a social problem, but higher borrowing costs could spell bad news for finance minister Gordon Brown, who looks certain to become prime minister after Tony Blair said he would step down on June 27th.
"Higher interest rates will squeeze family budgets tighter," said Angela Knight, chief executive of the British Bankers' Association. "People need to have a good hard look at their finances." The bank will publish its forecasts for inflation and growth next week and official inflation figures for April will be released.
"Our expectation is that the shape of the inflation projections will be consistent with rates rising again over the next few months," said Philip Shaw, chief economist at Investec. "There is also a possibility the bank could communicate something more transparent, although we are not certain what."
- (Reuters)
