20000114

Britain's central bank set to pull rate trigger

LONDON: The Bank of England's nine-member Monetary Policy Committee looks set to raise interest rates on Thursday by 25 basis points to 5.75 percent.

The move, widely expected by economists and spelling dearer borrowing costs for home buyers and businesses, will be announced .

In a Reuters poll, 27 economists out of 33 expected the bank's Monetary Policy Committee (MPC) to raise interest rates 0.25 percentage points, a modest move financial markets should comfortably absorb. Some economists even warned the MPC could opt for a 50 basis points rise.

"The MPC is likely to raise rates by 25 basis points but it is a tight decision (between higher and unchanged rates)," said Roger Bootle, economic adviser to professional services firm Deloitte and Touche.

The trouble for the MPC is that Britain's economy looks relatively inflation-free, and it is simply reacting to a potential threat in coming years.

With core inflation at just 2.2 percent and below the country's 2.5 percent target, rate rises are often opposed by industry and union groups, particularly as rates in euroland countries are just 3.0 percent.

DIRECTORS' GROUP BACKS RATE RISE, UNIONS OPPOSED: Employers' group the Institute of Directors (IOD) sparked surprise on Wednesday when it said it accepted the need for higher borrowing costs.

Ruth Lea, head of the IOD policy unit, suggested an interest rate rise was necessary to ensure growth was maintained over the economic cycle.

"We accept they (interest rates) need to rise in order to maintain the low inflation stability which is essential for business," Lea said.

Union groups, anxious to safeguard jobs, struck a different note.

"Competitive pressures on the high street and moderate wage settlements mean there is no short-term threat to the inflation target," said John Monks, General Secretary of the Trade Unions Congress.

"Manufacturing industry is still under great pressure a rise in rates now would put even more jobs at risk," he said.

MORE RATE RISES LOOM IN 2000: The central bank has already raised rates twice in September and November last year in a pre-emptive move to kill incipient inflationary pressures.

Economists said the in an effort to remain pre-emptive, looked set to tighten monetary policy further this year, with rates peaking at around 6.5 percent.

"It doesn't look as though there are any signs of things cooling off (in the economy) just yet," said Dharshini David, economist at HSBC Global Markets. She forecast that interest rates would peak this year at 6.5 percent at the end of the second quarter.

"It is likely that we have now entered a period of more aggressive tightening after the on-off pattern of the last four months," David said.

A raft of economic data last week stoked fears of an early - possibly sharp - increase in borrowing costs this year.

Britain's largest mortgage lender, Halifax Plc, said annual house price inflation hit 13.6 percent in December, the highest level since the runaway housing boom of the late 1980s.

But with both variable and fixed rate mortgages heading higher, economists predict the housing market should start to slow during 2000.

Employers' group the Confederation of British Industry reported last week that retail sales jumped in December, while a services sector survey from the Chartered Institute of Purchasing and Supply showed continued expansion.-Reuters