UK Central Bank Raises Rates; ECB Stands Pat

by William Patalon III
Managing Editor

The Bank of England boosted its benchmark interest rate by a quarter point to 5.75% on Thursday – the fifth increase in less than a year as the U.K. central bank seeks to throttle inflation.

The European Central Bank held its own key refinancing rate unchanged at 4%.

Both moves follow closely last week’s decision by the U.S. Federal Reserve to hold U.S. short-term rates steady at 5.25%. Until then, the Fed had raised rates steadily for two years.

The Bank of England move was widely expected. It solidifies Great Britain’s place at the top of the interest-rate chart in a listing of the world’s seven wealthiest nations.

The rate increase means that British interest rates are now at a six-year high as the Bank of England struggles with a booming housing market and spiraling prices.

Anticipation of Thursday’s rate rise drove the pound to 26-year highs above $2 and the currency nudged slightly higher again after the announcement to $2.02 before settling back slightly to $2.0102.

Britain’s domestic inflation has moderated somewhat since hitting a 3.1% peak in the year ending in March, but at 2.5% in the year ending in May it remains well above the 2% target set by the government.

The housing market is showing signs of slowing, although it continues to grow.

The bank’s monetary policy committee said that inflation is likely to continue to fall back to its 2% target for the remainder of 2006. But it believed the increase in rates was needed, since the “the balance of risks to the outlook for inflation in the medium term continued to lie to the upside.”

The ECB has had more success in containing inflation in the 13-nation EU region that shares the euro by raising rates about once every quarter since December 2005.