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From Bloomberg:

Bank of England Keeps Main Rate at Six-Year High of 5.5 Percent

By Brian Swint and Jennifer Ryan

June 7 (Bloomberg) -- The Bank of England left its benchmark interest rate unchanged at a six-year high, giving four previous increases time to slow inflation.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, kept the Bank Rate at 5.5 percent today, as predicted by 58 of 62 economists in a Bloomberg News survey. The rest predicted a quarter-point increase.

``They would like to wait and see how things progress before raising rates again,'' said Matthew Sharratt, an economist at Bank of America Corp. in London. ``We still expect them to move to 5.75 percent in the third quarter because they are worried about underlying inflation.''

Inflation has held above the Bank of England's 2 percent target for a year and the bank's forecasts show higher interest rates are needed to rein in prices. The one percentage point increase in borrowing costs over the past year has weakened consumer borrowing and cooled the housing market.

Futures trading suggests investors expect the rate to rise by September. The implied rate on the interest-rate futures contract maturing that month was at 6.07 percent as of 10:13 a.m. today in London, up from 5.8 percent April 10.

The contract, which settles to the three-month London inter- bank offered rate for the pound, averaged about 15 basis points more than the central bank's benchmark for the past decade.

ECB Rate Increase

The U.K. benchmark rate is the highest among Group of Seven countries. It compares with 5.25 percent in the U.S., 4.25 percent in Canada and 0.5 percent in Japan. The European Central Bank increased its main interest rate to 4 percent yesterday.

New Zealand's central bank unexpectedly raised its benchmark rate a quarter-point to a record 8 percent today to curb inflation. Slower price growth in Indonesia and Brazil led central banks there to cut their rates in the past day.

King said May 16 that policy makers are monitoring surveys of companies, which are ``particularly important'' at the moment for gauging the outlook on inflation. He said there is a risk that they will be able to charge their customers more and raise wages for their employees.

An index of U.K. retail prices reached the highest in nine years last month, the Confederation of British Industry said May 31. Manufacturers are the most confident since 1995 that they can charge their customers more, a CBI survey showed May 24.

Inflation Forecasts

The bank's May 16 forecasts showed that inflation will exceed the target in two years unless borrowing costs rise by another quarter-point. Economic growth is likely to be about 3 percent this year, the fastest pace since 2004, the bank said.

Policy makers predict the consumer price index will fall this year as energy prices decline. The annual rate of consumer price growth slowed to 2.8 percent in April after reaching a decade high of 3.1 percent the previous month.

``Everybody knows that the consumer price index is going to drop back,'' said Stephen Nickell, a former Bank of England policy maker, in an interview. ``While it's high there's a certain amount of nervousness, not least that it'll feed into wages.'' Nickell said he would opt for no rate change today if he were still on the bank's panel.

There are some signs that higher borrowing costs are starting to cool the economy. House prices rose 0.3 percent in May, the slowest pace this year, to an average of 196,893 pounds ($392,000) HBOS Plc, the U.K.'s biggest mortgage lender, said today. Retail sales and mortgage approvals fell and consumer credit reached the lowest in a decade in April.

Britons are shouldering a record 1.3 trillion pounds of debt and higher interest rates are making it more expensive to repay or make further borrowings.

The burden on consumers may increase further if policy makers raise the benchmark interest rate in the third quarter, as predicted by all except four out of 48 economists in a Bloomberg News survey.

``The bank is worried that we're not seeing the full effects of the rate hikes come through already,'' said David Page, economist at Investec Securities Ltd. ``Inflation is still very much on their mind. We expect one more hike.''

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net ; Jennifer Ryan in London at jryan13@bloomberg.net

Last Updated: June 7, 2007 07:00 EDT