Bank of England hints at interest rate increase

A senior Bank of England official today sent a clear signal that the Bank will again raise interest rates to head off inflationary pressures.

In a speech to fund managers in Edinburgh, Paul Tucker, the Bank's executive director in charge of financial markets, said the current Bank base rate of 4% still leaves "policy stimulating the economy".

His comments were in line with market expectations of another rise in borrowing costs, with most analysts predicting another quarter-point rise in May, though there is increasing speculation of a move in April in the light of recent strong sales data for January.

"If, as projected, output continues to grow above trend then, depending on any other developments affecting the outlook, I for one would expect us to continue gradually to reduce the degree of stimulus to demand broadly in line with the take-up of slack in the economy and any consequent pick-up in inflationary pressures looking ahead," Mr Tucker said.

The Bank's monetary policy committee (MPC) has raised interest rates by a quarter-point twice since November, which Mr Tucker described as "withdrawing some - but not all - of the previous stimulus".

The bank's two upward moves since November reversed two cuts of similar margins in February and July last year that took UK interest rates to a 48-year low of 3.5%. So far, the Bank's two rate increases appear to have had little dampening effect on consumption and house prices as the MPC itself acknowledged in its minutes of March 3-4, when the committee unanimously decided to keep rates on hold.

In saying that recent rate increases had withdrawn some, but not all previous stimuli, Mr Tucker dropped a broad hint that more interest-rate rises were on the way. In addition, Mr Tucker cited the tightness of the housing market and fairly buoyant business surveys as suggesting "that the near-term outlook for domestic demand may be slightly stronger than it looked a couple of months ago".

But he reaffirmed the Bank's gradualist policy and ruled out any intent to administer shock treatment to cool consumer demand and the housing market.

"I would not, however, subscribe to making a surprise policy tightening as a form of shock therapy. One of the emphases of the MPC's approach has been to do our utmost to help households, businesses and financial markets to understand our strategy and, in particular, how we react to developments in the economy," Mr Tucker said.

That was why, Mr Tucker added, that the MPC decided to keep rates on hold earlier this month, as an earlier-than-expected policy change might well have been misunderstood as a change in policy. Given that most City analysts expect the next rate rise to come in May, this would seem to indicate that a move next month is unlikely.

Mr Tucker reiterated the Bank's concern at high levels of household debt, fuelled in part by the increase in house prices, which has been used as collateral to secure borrowing.

"With higher debts relative to incomes, interest rate changes will tend to have a bigger effect on the income that households have free to spend after servicing their debts," he said.

Mr Tucker voiced concern about the health of the global economic recovery, with opinion divided on whether weakness in the US jobs market could dent confidence and spending and put the brakes on recovery.

"My take is that the most likely outlook is positive, but that downside risks have again become tangible," Mr Tucker said. In the euro area, "signs of recovery have recently been more apparent in the surveys than in the data", Mr Tucker said, but he continued to place greater weight on the encouraging surveys.