BoE: Interest rates may rise again

16-08-2006

The Bank of England (BoE) has given a strong indication that if current economic conditions persist it will raise interest rates again in the coming months.

Last week the bank's monetary policy committee (MPC) voted to increase the base rate a quarter of a percentage point to 4.75 per cent, and in today's quarterly inflation report, the BoE's governor admitted that inflation was set for a series of rises.

Mervyn King said that "overall the central view described in this inflation report is one of inflation rising further in the near term, before gradually returning towards the target over the forecast period".

Inflation peaked at 2.5 per cent in June, but today's report suggests that it will rise by 0.2 percentage points before the end of the year.

Explaining that inflationary pressures were "greater" than in May's report, Mr King pointed to the "erratic" fall in energy output.

However, the governor said that there had been a corresponding revival in household spending, with a general "rebalancing" of the UK economy being mirrored in increased levels of business investment.

"Against a background of firm growth and limited spare capacity, and with inflation likely to remain above target for some while, the MPC judged last week that an increase of 0.25 percentage points in the official bank rate was necessary to keep CPI inflation on track to meet the target in the medium term. It remains ready to take whatever action might be necessary in future," Mr King said.

Today's report concludes that as worries over energy supplies ease, inflation levels were likely to fall back to the target rate of two per cent by 2007, with a "balanced pattern of growth" in store for the UK economy.

Commenting on today's BoE statement, Howard Archer, chief UK and European economist at research firm Global Insight, said that interest rates are unlikely to surpass five per cent during the next two years.

"However, the BoE is making it clear that there is no pre-determined timetable over the extent and timing of any future hikes, and it will be driven by how the data pans out over the coming months," he said.

"Indeed, Mr King has highlighted the major uncertainties facing the inflation and growth outlooks," the economist added.


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