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Interest rates in early move to 5.25 per cent

Published On 11 January 2007 at 16:06:58

The Bank of England voted today to increase interest rates to 5.25 per cent.

Commentators were taken by surprise by the move, which is the third quarter point hike in four months.

The bank's monetary policy committee (MPC) was motivated by a need to stem inflation, with the consumer price index currently (CPI) above inflation at 2.7 per cent.

Next week's CPI figures are expected to confirm that inflation has breached the three per cent benchmark and today's move is regarded as a pre-emptive stance.

Trevor Williams, chief economist with Lloyds TSB Corporate Markets, said: "The timing of the rise is a surprise but the decision isn't.

"Many forecasters were expecting a move in February so while this is a month earlier than anticipated, it isn't a complete shock."

However, the Confederation of British Industry (CBI) has expressed regret that the MPC did not wait until March or February, as many commentators had predicted.

CBI chief economist Ian McCafferty said: "It is disappointing that, with only tentative indications about the outcome of the wage round, the bank has already decided to increase interest rates.

"If part of the intention was to dampen wage increases, it is doubtful a rate rise will have the desired effect.

"Unless wage settlements pick up steeply in coming months, inflation is set to fall back towards the bank's mid-point target of two per cent during the second half of 2007."

Other commentators defended the move, with the Institute of Directors describing it as "tough but wise".

"Inflation is well above target," said Graeme Leach, its chief economist. "The Bank of England's pre-emptive strike looks sensible."

The FTSE 100 fell in response to the announcement amid fears that it will constrict companies' growth and harm the housing market.

 

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