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BoE hikes UK rates to 6pc as economy booms

LONDON: The Bank of England on Thursday jacked up British borrowing costs for the fourth time in six months in a bid to take the heat out of an increasingly buoyant economy.

The move, which was widely expected by financial markets, raises the Bank's key interest rate by a quarter-point to 6.0 percent, the highest since last February when rates were on their way down to a 22-year low of 5.0 percent hit in June.

The rate change was the 16th the Bank's nine-member Monetary Policy Committee (MCP) has made in the 33 monthly meetings it has held since being set up in 1997. It means higher costs for many homeowners and industry but better returns for savers.

The latest increase follows hot on the heels of similar moves by the U.S. Federal Reserve and European Central Bank last week. British rates are now at the same level as those in the U.S. but nearly double the 3.25 percent level of the euro zone.

The MPC is increasingly concerned by surging house prices, which a recent survey showed were up 16 percent on a year earlier, robust consumer demand and a tight labour market, all of which it fears harbour inflationary pressures.

The MPC targets underlying inflation, which excludes home loan costs, of 2.5 percent. This measure, known as RPIX, is currently at just 2.2 percent but the MPC fears it will bust up through the target in two years' time, its favoured time horizon.

Bank of England Governor Eddie George has said several times recently that domestic demand would have to moderate and this latest move shows the Bank is determined to make that happen. The MPC made no statement to explain its latest move, however.

The economy is currently growing at an annualised rate of nearly 3.5 percent, well above what economists say is its "sustainable", or non-inflationary, rate which is widely agreed to be well under 3.0 percent.

Economists expect a further rise or two in coming months but most say rates are likely to peak at around 6.25 or 6.50 percent this year, below the 7.50 peak of 1998 and a world away from the double-digit rates of the early 1990s.

The Bank's recent rate rises have been greeted with scepticism by industry leaders who argue that they have been prompted by signs of boom in the prosperous South of the country but will inflict harm on manufacturers, who tend to be clustered in the North and who are only just emerging from recession.

The British Chambers of Commerce was swift to attack the move.

"This fourth rate rise in six months will inflict severe pressure on UK busines...with intense competition and an overvalued pound keeping inflation at bay, now is not the time to slam on the brakes," said Ian Peters, the BCC's deputy director-general.

Financial markets generally took the action in their stride, especially as 29 of 34 economists polled by Reuters last Friday predicted the quarter-point increase.

The pound, which hit 14-year highs on the foreign exchanges last week, dropped slightly against the dollar to $1.6072 but was steady against the euro at 61.4 pence. The FTSE 100 share index nudged lower, to be over 80 points down on the day, compared with 60 points before the annoucement.-Reuters