Interest rates rise again

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The Independent Online

The Bank of England raised its key interest rate to 4.5 per cent today - the fourth increase in eight months - amid mounting concern that Britain's skyrocketing property prices could crash and hurt the economy.

The Bank of England raised its key interest rate to 4.5 per cent today - the fourth increase in eight months - amid mounting concern that Britain's skyrocketing property prices could crash and hurt the economy.

The Bank's Monetary Policy Committee announced an increase of 0.25 percentage points in the base rate, which is what the Bank of England charges on loans to commercial lenders. Commercial banks and lenders use it as a guideline for their loans to businesses and individuals.

The Bank manages interest rates as a tool for controlling inflation.

The committee expressed concern that the accelerating global economic recovery and strong consumer spending might push prices higher.

"Inflationary pressures are likely to continue building," it said in a statement. "Household spending, public consumption and investment have all grown strongly and the housing market remains buoyant. The labour market has tightened further."

Financial markets had anticipated the rate hike, which followed a similar rise in May.

Many economists believe the bank needed to raise rates to slow the rapid rise in house prices, which are now beyond reach for many first-time buyers. A few economists, noting that property prices have surged in spite of gradual rate increases in recent months, had argued that the Bank needed to hike the base rate by half a percentage point to cool the market.

Homeowners, most of whom pay variable interest rates on their mortgages, expected to see their monthly payments grow.

Unexpectedly strong growth in manufacturing strengthened the case for a rate increase. Official figures released yesterday showed that factory output grew by 0.9 per cent in April, its fastest rate in almost two years. The manufacturing industries had been slow to recover from a downturn in sales and exports.

"Business accepts this latest rise as long as the motive is to ensure that interest rates peak at the lowest possible level," said Digby Jones, director general of the Confederation of British Industry, a leading trade group.

Because rate hikes tend to make the pound more expensive compared to other currencies, a pricier pound makes exports of British manufactured goods less competitive against products sold in euros, dollars or yen.

Some analysts expect the base rate to rise to at least 5 per cent by the end of the year.

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