Banks hints at interest rate rise

Friday, 25 February 2005 12:00 AM

The Bank of England's deputy governor, Rachel Lomax, has hinted at the prospect of interest rate rises in the near future.

She said that inflation was set to rise above the Bank's two per cent target "at some point" next year, adding that changes to interest rates take a year to feed through to the economy.

"We need to be pre-emptive, to head off trouble at the pass so to speak, even at the risk of sometimes taking the wrong decision," she told the Merseyside Economic Review 2005 yesterday.

The Bank increases and lowers the cost of borrowing in the UK to try and keep inflation in line with its target.

In recent weeks an increasing number of signs have been pointing towards the Bank's interest rate setting Monetary Policy Committee raising interest rates to five per cent.

And in the last week alone four members of the nine-strong MPC have been in the news.

Senior MPC member Kate Barker started the ball rolling by telling the Irish Times: "The main reason why we [the MPC] didn't put rates up last time is uncertainty about short-term trends in the economy.

"The peak in the [interest rate] cycle may not be very much higher," she said.

While this may seem innocuous, Ms Barker is known for her tendency to call for rates to be maintained or cut, having voted this way 87 per cent of the time.

On Wednesday the Bank of England released the minutes of the last MPC meeting, in which it was revealed that one member called for interest rate rises.

"The overall tone of the MPC minutes and the fact that one member has already shifted to voting for an interest rate hike reinforce our long-held belief that the next move in interest rates will be up," explained Howard Archer, chief UK economist at Global Insight.

The Bank's chief economist and MPC member, Charles Bean, also warned in a speech that a large rise in inflation could hit people's confidence in the Bank.

All of this has led economists to move their forecasts for when interest rates will rise from mid-summer to pre-May.

Over the course of 2004, the Bank increased interest rates four times to a three-year high of 4.75 per cent.

This added around £1,000 a year to the cost of an average mortgage, brokers calculated, but since August last year rates have been kept on hold.

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