May 10, 2007 12:00 pm

BoE raises interest rates to 5.5%

UK interest rates hit their highest level in more than six years on Thursday after the Bank of England raised the cost of borrowing to 5.5 per cent.

The 25 basis point increase, which had been expected by most economists, means Britain has now overtaken the US to shoulder the steepest borrowing costs of the G7 group of industrialised countries.

The move will pile more pressure on homeowners, with payments on a £200,000 repayment mortgage likely to rise by £30.45 a month, according to the Council of Mortgage Lenders.

In its statement accompanying the rise the Bank said it made the move because “output growth has remained firm. Business investment has been stronger than expected and, although indicators of consumer spending have been volatile, the underlying picture is one of steady growth.”

It added that relative to its 2 per cent inflation target, “the risks to the outlook for inflation in the medium term consequently remain tilted to the upside.”

A further guide to the Bank’s reasoning and its forecasts for the economy will be made available next week when it publishes its latest quarterly inflation report.

This is the fourth time that the Bank has tightened monetary policy since its first move in this cycle last August, when it raised rates to 4.75 per cent.

However, it may not be the last. Money markets are pencilling in a further increase to 5.75 per cent by the autumn, with traders convinced that more will be needed to cool the economy and send consumer price inflation back down from its current 3.1 per cent to the government’s target of 2 per cent.

Although Mervyn King, Bank governor, said recently that lower utility bills should help CPI inflation to fall sharply over coming months, his forecasts were nevertheless predicated on the probable need for Thursday’s tightening.

Some analysts had speculated that should the MPC move in line with market expectations - and not raise rates by 50 basis points as had been mooted by some earlier in the week - it would suggest that the inflation numbers for April, to which the MPC were privy, will indeed show a more benign inflation environment.

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