Bank of England Raises Rates to 5.25% today

The Financilal Times breaks this worrying news today

By Jamie Chisholm, Economics Reporter.
Published: January 11 2007 12:02 Last updated: January 11 2007 12:02

Interest rates hit their highest level in more than 5½ years on Thursday after the Bank of England surprised the City by raising the cost of borrowing to 5.25 per cent.

The quarter of a percentage point increase wrong-footed analysts, most of whom had expected the Bank’s monetary policy committee to stay its hand this month, before possibly introducing an increase in February.

Sterling and yields on government bonds jumped as the Bank said it had made the move because “the margin of spare capacity in the economy appears limited, adding to domestic price pressures.”
Domestic demand was growing steadily, while “credit and broad money growth remain rapid.”

“It is likely that inflation will rise further above the target [2 per cent] in the near term, but then fall back as energy and import inflation abate. Relative to the November Inflation Report, the risks to inflation now appear more to the upside,” said the Bank in a statement accompanying its decision.

The immediate business response to the Bank’s move – which came as the European Central Bank kept eurozone benchmark interest rates on hold at 3.5 per cent – was mixed.

Graeme Leach, chief economist at the Institute of Directors said: “This was a tough but wise decision. The MPC needed to stamp down on inflation given the upside risk at present.”
However, Ian McCafferty, chief economic adviser to the CBI, the employer’s body, said: “It is disappointing that, with only tentative indications about the outcome of the wage round, the Bank has already decided to increase interest rates. If part of the intention was to dampen wage increases, it is doubtful a rate rise will have the desired effect.”

A recent Reuters poll had shown that only one out of 50 economists thought the meeting would end with news of a quarter of a percentage point hike.

UK government bond prices tumbled and yields rose dramatically as traders confessed they were stunned by the Bank’s move.

“Hardly anyone was expecting this, so we saw some big moves at the short-end of the curve,” one London-based trader said.