The Bank of England raised interest rates by 25 basis points to 4.75 percent on Thursday, the fifth such hike since November, in an expected move aimed at cooling a roaring British economy.
The BoE said that though it expected inflation to fall in the near term, underlying cost pressures have risen and a hike was needed this month to keep inflation on track to meet its two percent target.
Economists said further interest rate hikes were still likely and futures markets are predicting borrowing costs rising above 5.0 percent by the end of the year.
“With demand already high relative to the supply capacity of the economy, continued strong growth is likely to lead to inflationary pressures,” the BoE said in a statement.
It noted that business surveys pointed to continued expansion and that the housing market was still buoyant though there were now signs that it may be starting to ease. Consumer spending may also be moderating, the BoE said.
The pound fell against both the dollar and the euro while government bonds and short sterling interest rate futures rose on relief that the BoE did not increase interest rates by 50 basis points as some had thought possible.
With the economy growing above trend and house prices still rising fast, many analysts are predicting the Monetary Policy Committee could hike rates again next month. It raised rates in consecutive months in May and June.
“We are going to need to see housing and consumption moderate much more quickly to prevent a further rate hike,” said James Knightley, economist at ING.
All but one of 45 economists polled by Reuters last week had predicted a quarter point hike though there had been some outside talk of a bigger move after a run of strong data.
Strong growth
The decision to raise interest rates was well sign-posted. The Monetary Policy Committee’s July minutes showed they kept rates steady last month partly because they feared a third successive 25 basis point hike would alarm financial markets.
Since then, there have been increasing evidence of inflationary pressures building in many sectors of the economy.
Annual house price increases are firmly in double digit percentages and consumers are borrowing at a record pace. And despite talk of consumer tightening their belts, retail sales surged 1.1 percent in June.
These data suggest the previous four rate hikes, which had brought cost of borrowing up by 100 basis points, had done little to restrain consumption.
At this meeting, the MPC also had before it the BoE’s new forecasts for growth and inflation which will form the basis of next week’s inflation report.
