UK Raises Interest Rates, ECB Holds Firm

Bank of England Increases Interest Rate to 5.75 Pct



=========================================================================
AP
UK Raises Interest Rates, ECB Holds Firm
Thursday July 5, 11:30 am ET
By Jane Wardell, AP Business Writer 
Bank of England Increases Interest Rate to 5.75 Pct; ECB Holds Euro Rate Steady at 4 Pct

With markets generally quiet in August, analysts have suggested the ECB may raise rates again in September to 4.25 percent -- making car loans and home mortgages more expensive for the 317 million residents who account for more than 15 percent of the world's economic production.

The widely expected move confirmed Britain's place at the top of the interest rate table of the world's seven wealthiest nations, as the European Central Bank held its own main refinancing rate unchanged at 4 percent.

LONDON (AP) -- The Bank of England raised its benchmark interest rate by a quarter of a percentage point to 5.75 percent on Thursday, the fifth increase in less than a year as it attempts to put a lid on persistent inflation.
ADVERTISEMENT
 
 
The widely expected move confirmed Britain's place at the top of the interest rate table of the world's seven wealthiest nations, as the European Central Bank held its own main refinancing rate unchanged at 4 percent.

British interest rates are now at a six-year high as the Bank of England struggles to contain rising prices and a booming housing market.

Anticipation of Thursday's rate rise drove the pound to 26-year highs above $2 and the currency nudged slightly higher again after the announcement to $2.02 before settling back slightly to $2.0102.

Domestic inflation has moderated somewhat since hitting a 3.1 percent peak in the year ending in March, but at 2.5 percent in the year ending in May it remains well above the government's 2 percent target.

The housing market also continues to grow, although there are signs that it is expanding at a slower pace.

The bank's monetary policy committee said that inflation is likely to continue to fall back to its 2 percent target over the rest of the year.

However, it added that it determined an increase was necessary because "the balance of risks to the outlook for inflation in the medium term continued to lie to the upside."

The ECB has had more success in containing inflation in the 13-nation region that shares the euro by raising rates about once every quarter since December 2005, and prices appear to be under control while unemployment is falling.

ECB President Jean-Claude Trichet told reporters that the bank would "monitor closely" inflationary threats, words seen as a signal that an increase could come in the next couple of months.

Trichet said the latest data showed that economic activity in the euro area expanded at "solid rates" in the second quarter. But he cited risks such as worries about a rise in protectionist pressures, the possibility of further increases in oil prices, wage agreements and concerns about global imbalances -- singling out foreign exchange issues.

With markets generally quiet in August, analysts have suggested the ECB may raise rates again in September to 4.25 percent -- making car loans and home mortgages more expensive for the 317 million residents who account for more than 15 percent of the world's economic production.

In Britain, analysts said the Bank of England gave few clues about future interest rate movements.

"Despite some tentative signs that higher interest rates may be starting to dampen consumer spending and slow the housing market, significant upside risks to longer-term price stability persist from firms' pricing power, excessively buoyant money supply growth and possible capacity constraints amid ongoing healthy growth," said Howard Archer, chief U.K. and European economist at Global Insight.

Like Trichet, he cited wage agreements as an area to watch.

"Furthermore, there is still a risk that pay could move significantly higher over the coming months, even though wages have remained broadly contained so far," Archer said.

Last week, the U.S. Federal Reserve Bank left its key rate unchanged at 5.25 percent, making it a year since the rate was adjusted. Until then, the Fed had raised rates steadily for two years.

In deciding to hold interest rates steady, Fed Chairman Ben Bernanke and his central bank colleagues stuck to their forecast that U.S. economic activity would rebound.

AP Business Writer Matt Moore in Frankfurt, Germany, contributed to this report.