The Bank of England stepped up the pace of interest rate rises yesterday, increasing its main rate by a quarter-point to 4.5 per cent as it attempts to stop surging house prices and record personal borrowing from fuelling inflation.
By acting for the second month in a row, City economists said, the bank's monetary policy committee (MPC) was showing it had lost patience with consumers' unchecked spending.
It is the fourth time the bank has raised interest rates since November. Previous rises were also a quarter percentage point but this was the first back-to-back hike in over four years.
The previous three rises came at three-monthly intervals, reflecting the bank's stated desire for a gradualist, predictable monetary policy.
"The MPC has sent its strongest signal yet that it wants to bring an end to the consumer and housing market booms," said Mr Roger Bootle, chief economic adviser to Deloitte.
The committee's move was a shift from its softly-softly approach of quarterly increases in November, February and May.
Mr John Butler, of HSBC, said this pattern had been aimed at trying to avoid causing panic. "The problem was that it worked but worked too well, as it seems to have been largely ignored."
In spite of the three previous rate rises, annual house price inflation has accelerated again to about 20 per cent, while consumer debt is approaching £1,000 billion (€1,513 billion).
But the MPC also signalled its confidence that the economy as a whole was growing strongly, at or above its trend level.
"Household spending, public consumption and investment have all grown strongly and the housing market remains buoyant. The labour market has tightened further," the committee said.
The bank also cited recent strong survey and official data that suggested output growth was around or above trend, the long-term average. Hence, although inflation was currently low, a hike was necessary to keep it in check. "Consumer price inflation has been below the 2 per cent target, but cost pressures are rising. As indicated in the May Inflation Report, a small and diminishing margin of spare capacity means that inflationary pressures are likely to continue building," the Bank of England said in a statement issued with its rate decision.
The bank last month forecast inflation above its 2.0 per cent target if rates were held at 4.25 per cent.
Economists said the statement suggested more rate rises were to come and that the pace of tightening had now changed. "The only way gradualism will come back is if the data weakens," said Mr Ciaran Barr at Deutsche Bank.
The futures market is pricing in a strong likelihood that rates will hit 5.25 per cent by the end of the year, and a Reuters poll of 32 economists yesterday found 26 expect the next rise in August.
Economists think it will be some time before the European Central Bank or Bank of Japan start to hike rates, although recent comments from the ECB have been interpreted to mean it is unlikely to give in to calls to cut rates further.
- (Financial Times Service/Reuters)
