Bank of England Will Probably Raise Key Rate to 5.75%

Bank of England policy makers will probably raise the benchmark interest rate for the fifth time in a year this week as Governor Mervyn King wins more support for an increase to curb inflation, a survey of economists shows.

The nine-member Monetary Policy Committee will lift the Bank Rate to 5.75 percent, the highest since April 2001, according to 53 out of 60 economists in a Bloomberg News survey. The central bank will announce the decision at noon in London on July 5 and release minutes of its meeting on July 18.

The bank's forecasts in May showed that four rate increases since August won't be enough to tame inflation, which has exceeded the 2 percent target for more than a year. King was overruled by colleagues in a 5-4 vote to keep borrowing costs unchanged in June, cementing speculation of an imminent increase.

``If they don't hike, they're at a serious risk of undermining their own message,'' said Michael Saunders, chief Western European economist at Citigroup Inc. ``It would be perverse not to deliver on May's promise when markets are expecting it.''

Investors raised bets last month on the interest rate moving to 6 percent. The implied rate on the December futures contract was at 6.26 percent on June 29, up from 6.04 percent on May 22.

The contract settles to the three-month London inter-bank offered rate for the pound, which averaged about 15 basis points more than the central bank benchmark for the past decade.

Surprising the Markets

``The fact that people now predict a July move may encourage them to hike rates, given that some of the majority at the last meeting were concerned about surprising the markets,'' said Jonathan Loynes, an economist at Capital Economics Ltd in London.

King told U.K. lawmakers in London June 28 that the balance of risks on inflation ``remains to the upside.'' Timothy Besley, who voted with King last month, said that raising rates now may reduce the need to lift them in the future and that the bank may even need to consider a half-point increase.

The central bank expects the economy to grow about 3 percent this year, the fastest pace since 2004, and for inflation to slow from a decade-high reached in March, according to the May 16 forecasts. Gains in consumer prices will breach the target in two years unless interest rates rise again, the bank forecasts.

The economy expanded an annual 3 percent in the first quarter, faster than previously reported, the Office for National Statistics said June 29.

Indicators Due

Surveys of purchasing managers may show continued growth this week. The Royal Bank of Scotland Group Plc releases an index of manufacturing growth today at 9:30 a.m. in London. A report on services industries will be published July 4.

Policy maker Rachel Lomax, who voted in the majority to keep the rate at 5.5 percent in June, said last week that she wanted ``to see data'' before deciding whether ``to push rates higher.''

Paul Tucker, who also supported no change last month, said that an increase in June would have sent the wrong message to markets. Kate Barker, who sided with him in the decision, said that the Bank of England risks losing credibility if it fails to contain inflation now.

The pound rose above $2 last week for the first time since April on speculation of rising interest rates. A report by Nationwide Building Society showed that U.K. house prices increased 11.1 percent in June from a year earlier. The monthly gain was 1.1 percent, the most this year.

King's standing on the committee may be threatened in the event of another defeat on rates this week, said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London.

``King has thrown down the gauntlet,'' said Walker. ``If he were to be outvoted again, people would ask if his credibility is diminishing.''

source:bloomberg.com