July 4, 2007 / 12:35 PM / 13 years ago

BoE looks set to raise interest rates again

LONDON (Reuters) - Interest rates look set to rise to a six-year high of 5.75 percent later on Thursday.

"For sale" signs in an undated file photo. House price inflation remained in double-digits in June and prices in the service sector accelerated, according to two separate surveys on Wednesday that reinforced expectations interest rates would go up this week. REUTERS/File

Fifty six out of 70 analysts polled by Reuters last week predicted the Bank of England’s Monetary Policy Committee would lift borrowing costs by another quarter percentage point at 12 p.m. - the fifth such hike since last August.

They reason that four policymakers, including Governor Mervyn King, wanted to raise rates in June. They were outvoted by the other five but that means only one of last month’s doves has to switch sides for a rise this month.

Paul Tucker is considered the most likely turncoat. The central bank’s executive director for markets voted to keep rates steady last month to avoid a surprise to the financial system. That argument doesn’t stand anymore.

“The market is now pricing in over a 90 percent chance of a move tomorrow,” said George Buckley, chief UK economist at Deutsche Bank.

TROUBLE AHEAD

Policymakers are worried about inflation — companies are running at full capacity and looking to jack up prices. House prices are still rising fast even after a full percentage point of monetary tightening in the last year.

But many Britons could be in for a shock in the next few months. Many took out two-year fixed rate deals on their mortgages in 2005 when official rates fell to 4.5 percent and markets were pricing in more cuts ahead.

Anyone coming off those fixed rates might end up paying out as much as two percentage points in interest higher on their home loan at a time when disposable incomes are already falling and the savings rate has been squeezed to its lowest in nearly half a century.

Britain’s new finance minister is worried. Barely a week into the job, Chancellor of the Exchequer Alistair Darling said in a newspaper interview on Wednesday that “what you don’t want are people to suddenly find that their outgoings have gone up quite dramatically.”

Personal bankruptcies are already at record levels and the financial watchdog sounded the alarm on Wednesday that lenders and brokers were not doing enough to check that customers could repay loans.

Some BoE policymakers are also concerned. Deputy Governor Rachel Lomax said last week that the central bank had to be wary of overdoing it on rate hikes. She seems unlikely to have changed her no-change call from last month.

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