Interest rates head for 6% by year’s end

Interest rates look all but certain to hit 6 per cent by the end of the year after the Bank of England raised its main rate – for the fifth time in a year – to 5.75 per cent on Thursday.
Chris Giles, economics editor, on the Bank of England’s decision to raise UK interest rates
Financial markets and economists hardened their expectations of 6 per cent interest rates and many now believe there is a strong chance that rates will rise to 6.25 per cent next spring, a rate not reached in the UK since 1998.
The Bank’s move came as eurozone interest rates also looked set to continue rising as the European Central Bank signalled another increase was likely in September.
In raising rates by a quarter of a percentage point, the Bank blamed strong growth, limited spare capacity and indications that businesses were poised to raise prices.
The similarity in the thinking of Europe’s central banks was striking. While uncertain about the future path of inflation, they warned that rapid economic growth and limited spare capacity had heightened risks and demanded action.
A Reuters poll on Thursday showed that a little more than half the 57 economists surveyed expected UK rates to hit 6 per cent by the end of the year.
Sterling remained just above $2 at $2.01 although the markets had already priced in Thursday’s rise.
The Bank’s statement gave no hints about future rate rises but stressed that, although inflation would fall this year as gas and electricity prices fell, “most indicators of pricing pressure remain elevated”.
“The balance of risks to the outlook for inflation in the medium term continued to lie to the upside,” it added as it said that these risks had persuaded the majority on the committee to vote for higher rates.
Andrew Smith, chief economist of KPMG, the accountants, said the Bank’s monetary policy committee would relax only when growth slowed. “This could well happen of its own accord as past rate increases bite – but, if not, it is too early to call the peak of the rate cycle.”
Since December 2005, the ECB has lifted its main rate eight times to 4 per cent. No change was announced on Thursday, but Jean-Claude Trichet, ECB president, said he would not want to change market expectations on the timing of the next move. Markets had factored in a two-thirds chance of a September rise, with October a less likely possibility.
A September rise would raise the possibility of a further increase before the end of the year – likely to be seen by many ECB governing council members as justified given recent stronger-that-expected data on eurozone economic activity.
“I don’t see why they would slow down the pace right now,” said Erik Nielsen, economist at Goldman Sachs.