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Last Updated: Thursday, 5 February, 2004, 15:33 GMT
How far will the Bank raise interest rates?

Analysis
By Evan Davis
BBC News economics editor

The Bank of England has raised interest rates again. But why have they acted now, with inflation so low, and will they continue to raise rates?

A quarter point up.

No surprise there, and not much in the way of controversy either.

Perhaps the right way of looking at the Bank of England's latest rate increase is not to ask "why did rates go up?" - but "why should rates stay down?" at such abnormally low levels.

After all, even at 4% they're far lower than we in the UK were used to until 2001.

And all the news of the past few months has demonstrated the economy is - to use a Bank of England word - resilient.

It's growing above the sustainable rate and the global economy is picking up, making it easier to export to overseas markets.

And there's little evidence of any crash in house prices or consumer borrowing.

Rebalancing the economy

The bank's objective, backed up by a strategy of gradually increasing rates, is to rebalance the economy away from consumer spending, towards exports and investment.

This goal appears attainable without an undue risk of slump.

The consensus forecast for the British economy in 2004 is for growth of 2.8%, with consumer spending growing by less than the economy for the first time since the mid-1990s.

Of course in raising rates, the Bank is taking a broad view of its mandate.

That mandate is to control inflation, yet inflation - as measured by the new Consumer Prices Index - is well below target.

Only by looking ahead could you justify the rise.

Who will suffer?

And what about the effect of this rise?

It will mostly be felt by people who've borrowed money in the past couple of years, and who haven't paid higher rates on their loans.

Most of the trillion pounds of household debt that is sitting around out there, was incurred when base rates were higher than they are now.

Thursday's rise is the second, but undoubtedly not the last of a series of rate increases.

Market expectations are that rates will hit 4.5% later this year.

If you are a borrower who thinks that is too difficult to cope with, it may be best to start preparing now.


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