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Bank of England set to raise rates to 6-yr high

LONDON - The Bank of England looks certain to raise interest rates this week as it battles to steer inflation, which is at its highest level in more than a decade, back to target.

The surprise surge in inflation above three percent forced the central bank to explain itself publicly for the first time last month and fuelled expectations rates will need to rise even higher in the coming months.

All 61 economists polled by Reuters reckon British interest rates will rise to 5.5 percent on Thursday. This would mark the fourth quarter-point increase since August and lift benchmark borrowing costs to their highest in six years.

The poll gives a 10 percent chance the bank will opt for a half-point rise. Such an increase would be the first since the bank was given independence to set interest rates a decade ago.

Nevertheless, given the bank’s insistence that price pressures will ease in the coming months and recent criticism of the it communicates with markets, this remains an outside chance.

“An interest rate increase of a quarter point is the likely outcome,” said Neil MacKinnon, partner and chief economist at ECU Group, a London-based currency hedge fund.

”Anything more aggressive at this stage seems heavy-handed and might also imply that the Bank of England is now worried that its inflation target won’t be met.”

Price pressures

Bank Governor Mervyn King has blamed much of the pick-up in price pressures on a surge in energy prices last summer.

Retreating world oil prices mean household energy bills are likely to ease this year but strong consumer demand and a tight labour market means price pressures in other areas may be building.

A survey last week showed manufacturers raised prices at a near record pace last month and official data has also shown a marked rise in factory gate inflation.

“The Bank of England is concerned by survey evidence indicating companies have become significantly more confident in their pricing power in recent months,” said Howard Archer at Global Insight.

“Back-to-back hikes in May and June are a very real possibility.”

Britain’s economy continues to grow strongly and house price inflation is running in double digits.

Nevertheless, a fall in approvals for new mortgages -- a more forward-looking indicator -- suggests higher borrowing costs may be starting to bite.

There are also signs consumers are starting to tighten the purse strings. A British Retail Consortium survey on Wednesday showed sales growth slowed in April to its weakest in five months.

“The BRC figures could be the first indication that retail sales growth has peaked,” said Vicky Redwood at Capital Economics. “That said, spending growth remains surprisingly firm in the light of recent interest rate rises. Accordingly, rates look likely to rise this Thursday and probably again thereafter.”