Bank bows to pressure

The Bank of England yesterday became the first of the world's top central banks to raise interest rates this year in a move which is expected to be followed soon by both the European Central Bank and US Federal Reserve.

Against a backdrop of accelerating global economic activity and mounting inflationary pressures, the Bank of England's monetary policy committee voted to increase its benchmark lending rate by a quarter point to 5.75%.

Britain's third rate rise since September is widely anticipated to be the harbinger of further increases in borrowing costs around the globe, with only struggling Japan of the big industrial economies forecast to leave policy on hold.

The Fed meets next month, with a rate rise of at least 0.25% predicted and the ECB is also expected to put up rates some time in the first three months of the year.

With three of the MPC's nine members having voted for a rate rise last month and the economy strengthening since then, yesterday's rate rise came as no surprise to the City, which took the move in its stride. The FTSE 100 closed down 1.3 at 6531.5.

In a statement, the MPC acknowledged that inflation was below the government's 2.5% target and was expected to remain so for a while. But it added that the rate of price increases was expected to rise above target further ahead. The MPC cited strengthening world activity and the buoyant outlook for domestic demand as reasons for its decision.

It said increases in wealth, due to surging house prices, rising average earnings and household borrowing all suggested consumer spending would continue to grow.

The strength of the housing market was underlined by the Halifax, whose survey showed London prices rose by an annual rate of 28.9% in the fourth quarter of last year, the fastest growth since the bank's records began in 1983. The price of an average property in greater London is now £142,762, while in the south east it is £121,535.

In its monthly report, published last night, the ECB said the euro area upswing was likely to continue and indicated that outlook for interest rates largely depended on the reaction of wage bargainers to an anticipated increase in consumer prices, driven by higher oil prices and the recent weakness of the euro. Earlier this week the German engineering union IG Metall lodged an inflation-busting pay claim of up to 5.5% which analysts said would unnerve the ECB.

The likelihood of an increase in interest rates in euroland was reinforced yesterday by an upward revision in French growth to 1% in the third quarter of last year. It followed an unexpectedly large 0.4% rise in inflation in December.