Bank of England raises interest rates

Bank of England raises interest rates
LONDON: The Bank of England Thursday revised the base interest rates up by 0.25 per cent to 5.75 per cent. The bank's Monetary Policy Committee voted to raise the rates to their highest level since March 2001. This is the fifth increase since August 2006.

Economists had widely expected the increase as inflationary trends have been very strong in the country. They predict the rates would touch 6 per cent or even higher anytime now.

A statement issued after the meeting of the committee said the committee is concerned about accomplishing the target of 2 per cent inflation. "The committee judged that, relative to the 2 per cent target, the balance of risks to the outlook for inflation in the medium term continued to lie to the upside.

"Against that background, it further judged that an increase in bank rate of 0.25 per cent to 5.75 per cent was necessary to meet the 2 per cent target for CPI inflation in the medium term."

The consumer prices index had dropped to 2.5 per cent in May from 3.1 per cent in March, but it is well above the treasury's set target of 2 per cent.

It is estimated that with the increase, which in all probability will be passed on to the lenders by the financial institutions, will mean that the borrowers will have to pay on an average an extra 16 pounds a month on a 100,000-pound mortgage. The four rate increases earlier have already added around 64 pounds to a home loan of 100,000 pounds.

The bank's governor Mervyn King had said earlier "further action" would become necessary if companies raised prices and if inflation continued to stay high. A report from the Chartered Institute of Purchasing and Supply and Royal Bank of Scotland released on 2 July showed that the index of factory gate prices was almost reaching an eight-year high in June.