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British interest rate hike seen next week

LONDON: The Bank of England will raise its short-term interest rate by 25 basis points to 5.75 percent next week on the back of a booming housing market and a barrage of strong economic data, economists predict.

"Average earnings, house prices and borrowing figures released since the last meeting should be enough to swing the MPC (Monetary Policy Commitee) vote from the middle ground in favour of a 25 basis point hike next week," said Stuart Edwards of S&P MMS. In a Reuters poll taken on January 6, 27 economists out of 33 expected the MPC to raise the repo rate to 5.75 percent when it meets on Wednesday and Thursday next week. They rated chances of a hike at 70 percent, according to the median forecast.

One economist forecast a 50 basis point rise to 6.0 percent and one gave a 50/50 chance of a rise or no change decision. The remaining four forecast no change.

The Bank of England's policy-setting MPC voted 6-3 to leave interest rates steady at 5.5 percent at its December meeting.

Economists said millennium concerns had prevented some MPC members from voting for a hike in December but with a bug-free Y2K, the path is now clear for the hawks to have their way.

A chief concern for the MPC this month would be soaring house prices, economists said.

Halifax Plc, Britain's largest mortgage lender, said on Thursday residential house prices in Britain rose sharply in December, with the annual rate surging to 13.6 percent.

"The housing market data, which has been so strong, has tipped the balance," said Elisabeth Hall at NatWest Group.

CONSUMER DEMAND FEARS

The economy is storming ahead, with strong consumer credit figures in November and robust December retail sales reported by the Confederation of British Industry this week. The risk is that the economy's buoyancy will spill over into stronger consumer demand growth, analysts said.

"While GDP growth is accelerating against a backdrop of low unemployment and and rising oil prices, the risks for inflation are biased to the upside," said Mark Ramsden at Stone & McCarthy. "And that balance of risk drives our forecast of further monetary tightening."

Philip Shaw of Investec said signs of a slowdown in activity have been few and far between, "keeping alive the MPC's concerns over the build-up of longer term inflation pressures".

Shaw said the MPC could raise rates by a further 25 basis points ahead of the Inflation Report in February. He forecast a peak at 6.5 percent by the end of the second quarter this year but then a drop back to 6.0 percent by the year-end.

"Providing the committee continues to act in a pre-emptive manner the economy will slow, and we still see a good chance that rates will be on a modest downard path by the year end."

In a separate Reuters survey on gross domestic product, economists predicted growth of 3.0 percent this year and 2.7 percent in 2001.

RATES TO PEAK AT 6.5 PERCENT

The survey forecast rates will peak in the current cycle at 6.5 percent, with economists split between the peak occurring in the first or second half of 2000. Last month economists said rates would peak at 6.25 percent.

Ramsden said rates need to be 75 basis points higher to dampen domestic demand, to peak at 6.25 percent in the second quarter of 2000. "Especially since faster growth in the rest of the world will give external demand a boost through H1 2000 at least."

But Neil Parker at Royal Bank of Scotland said rates would peak at 6.0 percent in May and the MPC would be watching a number of factors, not only the boom in house prices.

"They will also be concerned about recent weakness in equity markets and the continued strength of the pound, both of which argue for a cautious policy to further rate hikes," he said.-Reuter