Nov. 9 (Bloomberg) -- The Bank of England raised its benchmark interest rate to a five-year high, aiming to prevent accelerating inflation from sparking higher wage demands.
Policy makers led by Governor Mervyn King lifted the repurchase rate a quarter-point to 5 percent, the second increase of that size this year. The decision was predicted by all 60 economists in a Bloomberg News survey.
The U.K. economy, Europe's second-biggest, grew at the fastest pace in two years last quarter, house prices are surging and consumer-price increases rose above the bank's 2 percent target for a fifth month in September. King and his colleagues have said they're concerned that workers will demand bigger pay increases next year, entrenching faster inflation.
``You can call it a message: don't bank on inflation being high enough to support a big wage settlement,'' said Steven Bell, an economist at hedge fund GLC Ltd. who used to work at the Treasury.
Most wage negotiations take place in January and April, according to Catherine Chubb, a researcher at Incomes Data Services, a U.K. pay research group. Employers set to agree salary increases in January include Adidas AG, Balfour Beatty Plc and Bentley Motors, she said.
`We will see a pickup because of inflation,'' Chubb said. ``We expect pay deals to be between 3 and 4.5 percent. That's up from the median deal this year of 3 percent.''
Europe, Japan
Investors expect the Bank of England to raise rates again in the first quarter, futures trading suggests. The implied rate on the contract maturing in March 2007 was 5.42 percent at 10:33 a.m. in London, up from 5.19 percent at the start of September.
Concern about inflation sparked a global round of rate increases. The European Central Bank is poised to raise its rate a quarter point to 3.5 percent next month. Bank of Japan Governor Toshihiko Fukui has said he will lift the bank's rate ``little by little'' from 0.25 percent. The U.S. Federal Reserve kept its rate at 5.25 percent for the past four months after 17 increases starting in June 2004.
A revival in the U.K.'s $6.9 trillion housing market has buoyed consumer spending, the largest part of the economy. House prices rose the most in six months in October, pushing the average cost of a home to 184,593 pounds ($352,000), a report from HBOS Plc, the country's biggest mortgage lender, showed today.
Rising house price have left British consumers shouldering a record 1.3 trillion pounds in debt that higher interest rates will make more expensive. Personal bankruptcies rose to a record in the third quarter.
Mortgage Burden
Abbey National, the U.K.'s second-biggest mortgage lender, is offering homebuyers the chance to borrow five times their salaries. Each quarter-point rate increase raises the monthly payment on a 150,000-pound mortgage by about 23 pounds, said Stuart Bernau, executive director at Nationwide Building Society.
``There is a lot of consumer debt out there which people are concerned about,'' Bernau said in an interview yesterday. Rate increases ``mean that monthly payments are going to go up. It would hit peoples' confidence.''
Rising interest rates threaten the outlook for business, Marks & Spencer Group Plc finance director Ian Dyson said Oct. 7. Still, his company, the U.K.'s largest clothing retailer, reported its highest first-half profit in nine years.
Services ranging from banking to telecommunications expanded at the fastest rate in six months in October, a report from the Chartered Institute of Purchasing & Supply showed Nov. 3.
New Forecasts
The Bank of England forecast in August that inflation would quicken to about 2.7 percent by the end of this year, based on market expectations of a rate increase to 5 percent. Economic growth will be ``slightly stronger,'' the bank said, peaking above 3 percent in the second half before slowing to about 2.5 percent at the end of 2008. It publishes new forecasts Nov. 15.
``The new forecasts will be key,'' said John Butler, a former Bank of England economist who now works at HSBC Holdings Plc. ``They'll say that if the upside risks materialize, they're going to keep hiking. If pay settlements pick up, they'll pull the trigger again in February.''
Booming business in the City of London, the U.K.'s financial district, has driven the growth in house prices. The city's top bankers may earn a record 8.8 billion pounds ($16.7 billion) in bonuses this year, more than Iceland's gross domestic product, the Centre for Economics and Business Research Ltd. said Oct. 30. London accounts for 25 percent of the country's economy.
Rising Unemployment
Slack in the labor market may curb inflation. Unemployment reached rose to a five-year high in September as immigration boosted the workforce. Manufacturers are shouldering the pound's 11 percent gain against the dollar this year and a slowdown in the U.S., which buys about a 10th of Britain's exports.
``There's little evidence the economy is overheating, and when I speak to members round the country, they say the global pressures are enormous and confidence is rather fragile,'' David Frost, director general of the British Chambers of Commerce, which represents more than 100,000 companies, said in an interview.
A pickup in money supply may signal increasing inflation pressures, King said. M4, the broad money measure, grew an annual 14.5 percent in September, the highest since 1990.
``When money supply is growing at 14 or 15 percent I think even non-monetarists like me have to sit up and take note,'' said Roger Bootle, economic adviser to Deloitte & Touch LLP, in a television interview on Nov. 7. ``It's indicating that perhaps the level of interest rates is too low.''
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