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Echoes from 1930: Central banking''s main purpose is to control the gold price
Bank of England Raises Interest Rate by Quarter Point
By Sam Fleming
Bloomberg News Service
Thursday, June 10, 2004
http://quote.bloomberg.com/apps/news?
pid=10000006&sid=aPU.2mRKT0xo&refer=home
LONDON -- The Bank of England raised its benchmark
interest rate for a second consecutive month, by a
quarter point to 4.5 percent, to prevent record
consumer borrowing and surging house prices from
fueling inflation.
The decision takes the rate to its highest since
October 2001 and marks the first back-to-back
increase since the beginning of 2000. It widens
the gap with borrowing costs in the United States,
Japan, and the 12 nations sharing the euro.
Policy makers led by central bank Governor Mervyn
King said "inflationary pressures" are building in
Europe's second-biggest economy, citing rising
household and government spending as well as a
"buoyant" housing market. House prices rose an
annual 20.4 percent in the quarter through May,
according to HBOS Plc, and Britons have piled up
debt of 985 billion pounds ($1.8 trillion), almost
equal to the nation's gross domestic product.
"The main risk to their inflation projection must
have been that we're borrowing beyond our means,"
said Andrew Clare, a former Bank of England analyst
who is now chief economist at Legal & General Asset
Management. "They're trying to rein back consumers'
appetite for debt. There's been no response at all
from the consumer" to three previous rate increases.
The pound stayed near its highest in eight weeks
against the euro after the decision. It traded at
65.93 pence per euro at 12:04 p.m. in London from
66.02 late yesterday. Two-year notes extended
declines, with the 8 1/2 percent gilt due December
2005 shedding 0.07, or 70 pence per 1,000 pounds
($1,824) face amount, to 104.95, according to
Dresdner Kleinwort Wasserstein.
The Bank of England was the first of the world's
four top central banks to begin lifting rates since
recessions in the United States, Germany and
Japan in 2001 and 2002. The central bank of
Japan cut rates to almost zero in March 2001.
The U.S. Federal Reserve and the European
Central Bank haven't lifted rates since 2000,
though the Fed is expected to at least double its
1 percent target rate by year-end, according to
a Bloomberg survey of economists at 23 primary
U.S. government securities dealers.
The U.K. central bank began increasing borrowing
costs from a 48-year low in November and until
this month followed a pattern of quarterly moves
at three-month intervals. In last month's meeting
of the Monetary Policy Committee, members said
it may be necessary to raise rates faster than
investors expect to contain inflation, which the
bank expects will exceed its 2 percent target in
two years.
Consumer prices rose an annual 1.2 percent in
April from 1.1 percent the previous month.
Economic reports since then have suggested
consumers are shrugging off higher interest rates,
and today's decision shows that policy makers have
stepped back from their previous policy of keeping
to "gradual" changes in rates, economists including
John Butler of HSBC Bank Plc said.
"The MPC need to step up the pace, which means
for now more frequent rather than bigger rate moves,"
said Butler. It "represents the end of the so-called
gradual approach."
Twenty-six out of 47 economists surveyed by
Bloomberg had predicted today's increase with the
rest forecasting no change.
The increase, if passed on by lenders, will boost
the monthly repayment on a typical 100,000-pound
mortgage by 15 pounds to 606 pounds, according to
the Council of Lenders, whose members account for
98 percent of mortgage lending.
"This confirms the bank is taking a more aggressive
approach than in the recent past, in the light of
growing inflationary pressures," said Bob Pannell,
head of research at the CML. "This rate rise is
unlikely to be the last."
Barclays Plc, Lloyds TSB Group Plc, and the British
unit of Citigroup Inc. raised their bank lending rates
by a quarter point after the decision.
The Bank of England in May projected economic
growth will peak at about 3.6 percent at the end of
this year, above the 2.5 percent pace associated
with stable inflation. The economy grew 0.7 percent
in the quarter through May, bolstering the case for
a rate increase, the National Institute of Economic
& Social Research said yesterday.
Recent economic reports have confirmed signs of
acceleration in economic growth, including consumer
spending. Households are borrowing at a record rate
to finance house purchases, figures from the Bank
of England showed last week. Mortgage lending
rose by 9.8 billion pounds in April.
Surveys of purchasing managers last week showed
expansion in services, construction, and manufacturing
in May, while the British Retail Consortium this week
said shop sales increased in May at the fastest pace
in four months.
A government report yesterday showed manufacturers
increased production in April by 0.9 percent, the fastest
pace in more than 1 1/2 years, bringing official figures
closer into line with independent surveys that had been
showing a recovery and increasing the chances of an
interest rate increase, economists said before today's
decision.
"Robust borrowing data, house price rises, and positive
surveys likely proved enough to tip the majority of MPC
'over the edge' to favoring a rate hike," said Melanie
Baker, an economist at Morgan Stanley. She brought
forward her expectation of the next rate increase to
August from September.
Andrew Large, one of the Bank of England's two deputy
governors, has argued before today's decision that
interest rates should be increasing faster to reduce
the risk of a slump in consumer spending resulting
from excessive debt. Today's decision suggested that
argument may have held sway. Minutes of the June
meeting will be released on June 23.
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