MPC increase interest rate by quarter-point
4th August 2006

The Bank of England increased the interest rate by a quarter-point to 4.75%, which surprised many homeowners and businesses. Only a handful of City economists had predicted a rise in rates, which would increase borrowing costs.

The rise in rates could have adverse effects on homeowners already stretched, which could lead some into bankruptcy.

Although, the rise was unexpected and the MPC was accused of "jumping the gun", the case for the rise was formidable. For one, inflationary pressures have increased, where it was once 1.8% as early as March and now at 2.5%, well above the government's target of 2%. Since the consumer price index series was adopted in 1997, inflation has only reached 2.5% once, which was last September. What is more worrying, is that inflation looks likely to rise even more due to rising energy prices.

Secondly, the economy has grown faster than predicted, which has been fuelled by the consumer spending resurgence, and a pick-up in business investment and exports.

The FTSE 100 was sensitive to the interest rate rise as it slumped by about 2%.

Kevin Hawkins of the British Retail Consortium argues that consumer confidence is already low and the rise in interest rate will only make consumers even more pessimistic.

The hardest hit will be homeowners and first-time buyers. There is also concern about the effect the rise will have on borrowers who felt that the interest rate would remain stable after being convinced falsely of stable rates.

It is predicted that the bank may raise interest rates again but not until next year but some even predict another rise by October. Many will be eager to look at the MPC's Inflation Report which will be published on August 9th, which will hopefully cast some light onto what the bank may do in the future.

Sources - summary of:
The Times - Surprise interest rate rise to curb spending
The Economist - A surprise increase