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Bank of England Unexpectedly Raises Benchmark Rate to 4.75%

The Bank of England unexpectedly raised its main interest rate for the first time in two years to 4.75 percent to head off inflation as economic growth accelerated.

The bank said today after its seven policy makers met in London that it lifted the benchmark rate by a quarter-point, a move predicted by just eight of 46 economists surveyed by Bloomberg News. The other 38 economists had forecast no change. The bank will publish quarterly economic forecasts on Aug. 9 and minutes of this meeting on Aug. 16.

Growth in Europe's second-biggest economy reached the fastest pace in two years last quarter and record oil prices sent inflation in June above the bank's 2 percent target for a second month. The Bank of England, led by Governor Mervyn King, is following central bankers around the world in raising borrowing costs to prevent an inflationary spiral.

``Inflation is likely to remain above target for the next few years,'' said Kevin Daly, a London-based economist at Goldman Sachs Group Inc., which forecast today's increase. ``The Bank of England isn't going to ignore the fact that inflation is above target right now either.''

Investors were betting on at least one increase this year. The implied rate on the interest-rate futures contract maturing was 4.99 percent at 10:04 a.m. in London. The contract settles to the three-month London inter-bank offered rate for the pound, which has averaged about 15 basis points more than the central bank's target for the past decade.

The pound has gained 8.6 percent against the dollar this year as expectations of higher rates increased. The currency traded at $1.8709 today.

Central Banks

By standing pat since a rate cut last August, Bank of England policy contrasted with central banks in the U.S., Europe, and Asia. Fifteen raised borrowing costs in July, following 17 in June, including the European Central Bank. The ECB will increase its rate again to 3 percent today, according to all 46 economists in a Bloomberg News survey.

The Bank of England increase may help the economy avert overheating after 36 consecutive quarters of growth overseen by Prime Minister Tony Blair and his Chancellor Gordon Brown. That record of uninterrupted economic expansion helped Blair win a third term of office in May last year.

Economic growth accelerated to 0.8 percent in the second quarter from a 0.7 percent pace in the previous two, led by a 1 percent gain in services such as retail and banking. Retail sales rose for a fifth month in June.

The inflation rate in June was 2.5 percent, matching the highest since the current index was introduced in January 1997.

`Bottom Line'

``The bottom line for the bank is that growth has been above its 0.6 percent long-run average for nine months,'' said Ian Kernohan, an economist at Royal London Asset Management in London, which helps manage $54 billion in assets. ``That's enough to trigger a rate rise.'' He correctly predicted today's increase.

An index of services, which account for almost three- quarters of the economy, was little changed at 57.9 in July after a reading of 58.7 the previous month, the Chartered Institute of Purchasing & Supply and Royal Bank of Scotland Plc said today. A level above 50 signals growth.

Economists who predicted no change in rates today cited signs companies have kept a lid on wages to control costs. Average earnings including bonuses grew 4.1 percent in the three months through May, compared with 4.4 percent in the quarter through April.

Energy Costs

Rising unemployment and higher utility bills have also curbed consumer spending growth, which slowed to 0.3 percent in the first quarter from 0.8 percent in the previous three months. Claims for jobless benefits rose to 956,600 in June, the most in more than four years.

Energy supplier Centrica Plc said July 27 it will raise gas prices for customers by 12.4 percent and electricity costs by 9.4 percent from Sept. 4, the second round of increases this year. Crude oil costs have gained 24 percent the past year and reached a record of $78.49 on July 14.

The central bank predicts that a yearlong pickup in residential property prices will help support consumer demand. HBOS Plc, Britain's biggest mortgage lender, said today that house prices grew at an annual rate of 8.8 percent in the three months through July.



To contact the reporter on this story:
Craig Stirling in London at cstirling1@bloomberg.net.
http://quote.bloomberg.com/apps/news?pid=20601087&sid=aNi6VEJrh544