As expected, the Bank of England has raised UK interest rates as it fights to contain inflation which is at its strongest in more than a decade, 3.1%. The Bank’s target is 2%. It is the fourth quarter-point rise since August, but previous rate increases have failed to cool the property market or consumer spending.
At 5.5% the cost of borrowing in the UK is at the highest in six years. One day earlier the Federal Reserve had kept US rates unchanged. Many economists are predicting a further increase in the UK, perhaps as soon as next month, as the British economy has been growing strongly.
Meanwhile, the European Central Bank’s Governing Council, meeting this month in Dublin, kept the benchmark interest rate for the Euro zone at 3.75%.
President Jean-Claude Trichet used the phrase “strong vigilance” which signalled a rate rise next month to 4%. He said: “We decided at today’s meeting to leave the key ECB interest rates unchanged. Strong vigilance is of the essence in order to ensure that risks to price stability over the medium term do not materialise, that medium to longer term inflation expectations in the Euro area remain solidly anchored at levels consistent with price stability.”
In the Euro zone, inflation has been running below 2% – where the ECB wants it – for the past eight months. But the central bank is worried it could rise towards the end of the year, particularly as price pressures are growing in the services sector, which makes up two thirds of the Euro zone economy.