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Wednesday, 15 May, 2002, 15:56 GMT 16:56 UK
Bank hints at UK rate increase
![]() The Bank of England last cut rates in November
The Bank of England's rate-setting body has signalled that inflation may rise more quickly than previously thought, reinforcing expectations of an increase in interest rates.
The MPC's latest growth and inflation projections, based on the assumption that interest rates remain constant at 4%, have both been revised upwards from its previous report, published in February. The report reinforces the view that the next move in borrowing costs will be upwards, partially reversing a series of cuts beginning in February last year which trimmed base rates by a total of two percentage points. Doves on the run? "The inflation report is much more hawkish than had been expected. This is the nearest the MPC comes to a tightening bias," said John Butler, economist at HSBC. The MPC said that the UK economy hit a zero-growth trough during the tail-end of 2001, but is now picking up again. It added that extra government spending and strengthening world demand are likely to stoke growth further in the months ahead, outweighing a slight decline in household spending.
The monetary policy committee is charged with keeping inflation within one percentage point either way of the 2.5% target. A sustained rise above 2.5% would increase the likelihood of an increase in interest rates. "The Committee stands ready to act to contain any developing inflationary pressures further ahead," the MPC said. Uncertain timing However, some economists downplayed the prospect of an imminent rise in interest rates, pointing out that inflation is not projected to rise above 2.5% for nearly two years. "While the report suggests that the committee is starting to think about raising interest rates at some point, it by no means suggests that a hike is imminent," said Jonathan Loynes of Capital Economics. On Wednesday, news of a surprise increase in the number of people out of work and claiming unemployment benefit increased speculation that rates will remain on hold for now. The MPC cut interest rates by two percentage points to their current 37-year low of 4% last year in an attempt at staving off recession. The last reduction came in November 2001. The MPC has not raised rates since February 2000. The panel's next monthly meeting is scheduled for 5 and 6 June. |
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