Bank sees no need to explain rate rise

The Bank of England was in non-communicative mood yesterday when it put up rates for the fourth time in six months. It told the waiting world that the cost of borrowing was going up from 5.75% to 6% and left it at that. No explanation, no mention of what was worrying the nine-strong monetary policy committee.

Away from Threadneedle Street, there were plenty of people who wanted their say. The CBI and the TUC claimed that, with the pound already too strong for comfort, the result would be even more pain for manufacturers and exporters.

The chancellor attracted his share of brickbats, despite washing his hands of monetary policy in May 1997. Gordon Brown had made it clear that he wanted rates to go up, and they duly did. There were grumbles from the British Chambers of Commerce and the Engineering Employers Federation, which both want fiscal policy to be tightened in the budget to take the heat off monetary policy.

Three questions arise from the rates decision. The first - why the Bank did it - is easy to answer. Every member of the MPC has been surprised at the resilience of the economy over the past year, and fears that inflation will rise above the government's 2.5% target.

There is no shortage of evidence to back up the hawkish case. The Bank could take its pick from the strength of growth in the second half of 1999, the buoyancy of consumer spending, signs that the booming property market is triggering a wave of equity withdrawal, the tightness of the labour market following the decline in unemployment to a 20-year-low.

Suggestions that Britain is enjoying its own new paradigm, with competitive markets and new technology driving down prices, have yet to impress the MPC.

What happens next? Economists are divided between those who believe the Bank is doing too much, too soon and those who believe rates will have to rise a lot further.

Michael Saunders of Salomon Smith Barney Citibank suspected yesterday's rate rise would "not prevent domestic demand remaining very strong. Despite the very high pound, exports are benefiting a bit from the strength in world trade. As a result, overall GDP growth probably will stay above trend, causing capacity strains to worsen further." He said rates could rise to 7% by the end of 2000 and peak at 7-8% next year.

Given that next year is election year, the third question is whether Mr Brown will try to find an alternative to tighter monetary policy. Fiscal policy is already tight and there is no guarantee that tightening it further would lead to a lower pound. Many of the industrialists complaining about higher interest rates would complain equally loudly about higher taxes.

Some commentators suggest Mr Brown should take specific action against the housing market. But stamp duty has already been increased, while slapping capital gains on housing is not the sort of measure a government contemplates with the Daily Mail in full cry.

Conclusion? There's more interest rate pain to come.