June 7, 2007 / 11:03 AM / 13 years ago

Bank holds interest rates for now

LONDON (Reuters) - The interest rates stayed at a six-year high of 5.5 percent on Thursday but the Bank of England is expected to raise them again in the next few months.

A bank branch in a file photo. The Bank of England held interest rates at a six-year high of 5.5 percent on Thursday, as expected, but most economists predict another rise before long. REUTERS/Darren Staples

Most experts had guessed the Bank would refrain from hiking borrowing costs just a month after it increased rates a quarter percentage point for the fourth time since August.

Even so, the pound fell and government bonds cut losses because markets had geared up for a surprise move after being caught napping by a hike in January and given that some policymakers had even thought of a half-point move last month.

But futures markets are still pricing in rates — already the highest among major economies — getting to 5.75 percent this summer, and even a good chance of 6 percent by the end of the year as policymakers everywhere are twitchy about inflation with energy prices rocketing and economies booming.

“The Bank of England have sat on their hands this month, but the writing is definitely on the wall for a hike in July,” said David Brown, chief European economist at Bear Stearns.

Others say August is a safer bet for a move — the BoE publishes its quarterly forecasts that month — as that will give the policymakers more of a feel for how the economy is responding to a full percentage point of monetary tightening.

PILING ON THE PAIN

There are signs four rate hikes are already having some impact on the property market — the central bank has been desperate for something to take the wind out its sails.

The Halifax index on Thursday showed house prices rose by just 0.3 percent last month, the slowest increase this year, though that still left the annual rate in double digits.

Mortgage approvals have also fallen and surveys point to buy-to-let owners being forced to sell up as higher borrowing costs eat into what were once easy profits.

Many Britons with holiday homes on the continent in countries like Spain and Portugal may also be feeling the pinch as euro zone interest rates went up again on Wednesday to 4 percent — double what they were in 2003.

Signs of financial stress are already there.

Personal bankruptcies have hit record levels and home repossessions are up. Many Britons, meanwhile, remain unable to buy a home at all as the London market, buoyed by rich foreigners and financial sector bonuses, climbs ever higher.

“Housing affordability has reached a critical point,” said Stephen Nickell, former BoE policymaker and the chairman of a new body to improve the workings of the housing market.

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Some economists warn further rate rises could hit consumers too hard and slow the economy more than warranted.

But policymakers have also made clear they are worried about rising price pressures. Annual inflation has slipped from its series high of 3.1 percent in March but is still running way above the central bank’s 2 percent target.

Business surveys have been showing firms increasingly confident about raising their prices, and consumer spirits are high despite the rise in borrowing costs over the past year.

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