Bank of England in shock rate hike to 4.75 percent

Bank of England in shock rate hike to 4.75 percent

	Published : Fri, 04 Aug 2006 10:35 By : David Simms Print this Story

LONDON - After months of speculation, the Bank of England's Monetary Policy Committee finally made a move on the interest rates which were on hold at 4.5 percent since August last year. However the MPC's decision was a surprising quarter point hike in the interest rates to 4.75 percent making mortgage, overdraft and credit card debt costlier.

This unexpected and according to industry and unions, unnecessary move by the bank is in total contradiction to the cut in the repo rate last year and has sparked immediate fears that it will be raised once again by the end of the year. But Bank of England officials say that this move was made to contain inflation and do not rule out another hike if the inflation risks persist. This move means that for an average homeowner, he will have to cough up an extra £12 each month for repayments to an £80,000 mortgage.

Industry leaders have criticized the move and said that this could lead to increase in the number of insolvency cases and the bank's pre-emptive strike against inflation would stop the economy from recovering. Richard Lambert, the director general of the Confederation of British Industry, said, "CBI member companies will be disappointed by this increase but they will hope that a modest rise now will remove the risk of a more significant increase later in the year".

The British Chambers of Commerce too were clearly unhappy with the move saying, “The MPC has done nothing to support the UK’s economic recovery by increasing rates. We appreciate that it must make difficult choices but the correct decision would have been to keep rates on hold."

The bank has defended itself saying that it does not see inflation, at 2.5 percent, coming down to its target of 2 percent. In a statement the bank said, "Against the background of firm growth, limited spare capacity, rapid growth of broad money and credit, and with inflation likely to remain above the target for some while, the committee judged that an increase was necessary to bring consumer prices inflation back to the target in the medium term."

Analysts predict that this move will slow down the housing boom in the country. It remains to be seen what effect this hike will have on the other sectors.