Bank avoiding interest rate shocks

The Bank of England does not want to jolt consumers with surprise increases in interest rates, Bank officials said today.

Members of the Bank's monetary policy committee (MPC) told MPs that they have been deliberately cautious because of the potential consumer reaction.

Mervyn King, the governor of the Bank of England, said the MPC did not set out to surprise people with interest rate moves, while MPC member Kate Barker said that jolting the consumer too much might be dangerous.

"I think we were concerned when we were contemplating making the first rate increase in over four years that there could be a jolt to asset prices in financial markets," Mr King told the Treasury select committee. "We were just generally uncertain how consumers might react."

The Bank last raised interest rates in February, the second quarter-point hike since November, in an effort to dampen rampant consumer demand and the booming property market.

Most analysts expect the next move to occur in May, although there is speculation that the MPC may act at its April meeting in two weeks' time, because there has been little consumer reaction to the rise in borrowing costs. But Bank members said they were not in the business of using shock tactics.

"Jolting the consumer too much might be rather a dangerous tactic," said Ms Barker.

Bank members also voiced their concern that rising rates could strengthen the pound and make life difficult for British exporters.

"The effective exchange rate is now 6% higher than when we last met the committee and is continuing to make life difficult for many exporters," Mr King said, referring to changes since his previous testimony in November.

His comments prompted a sterling sell-off as some dealers bet that a rate rise might have to wait until May. The pound tumbled 1% against the euro and 1.5 cents against the dollar on the view that an April rate hike may now be less likely.

"We had gone into today's testimony concerned that the chances of a hike in April had risen and perhaps close to or above 50%," Alan Castle, UK economist at Lehman Brothers, told Reuters. "However, given that the testimony has played up the strength of sterling ... we are inclined to stick with our baseline call for a rate hike at the next inflation report meeting in May."

Despite the strength of sterling, the Confederation of British Industry's monthly snapshot of the manufacturing sector showed order books at their healthiest level in three years, with export orders in their best showing since November 1996.

Given the mixed economic signals, much will depend on new data on consumers and house prices. Further strength could push the Bank into a rate rise next month, especially as some members appear to believe the pound's movements should be discounted.

When they met earlier this month, all nine MPC members voted to keep rates on hold, but, as minutes of that meeting showed, concern is growing at the high levels of spending and borrowing.

Sir Andrew Large, the Bank's deputy governor, said if he were to create a newspaper headline to sum up the Bank's message to the average household it would be: "Increase your debt with care."