By Brian Swint
Aug. 8 (Bloomberg) -- The Bank of England indicated it will have to raise the benchmark interest rate once more as record oil costs and rising food prices keep inflation above its target for the next two years.
The inflation rate will stay above the 2 percent goal until 2009, the central bank said in its quarterly inflation report today. The forecasts assume policy makers will raise the Bank Rate a quarter-point from the current 5.75 percent by the first quarter of next year.
The pound rose as investors increased bets that the central bank will raise the key rate beyond 6 percent in 2008. Inflation, which has exceeded the target for 14 months, may hold above the goal as the British economy grows this year at the fastest pace since 2004.
``Indicators of pricing and capacity pressures remain particularly important,'' Governor Mervyn King said at a press conference in London. ``If they do not fall back, that would be consistent with the upside risks to inflation crystallizing.''
The pound, which climbed to a 26-year high of $2.0654 on July 24, rose to $2.0389 at 2:50 p.m. in London.
King and policy makers around the world are keeping their focus on inflation even after a financial-market rout sparked by the U.S. subprime mortgage crisis prompted some economists to speculate they would take steps to safeguard growth.
`Predominant Risk'
The Fed, which yesterday kept its benchmark at 5.25 percent, said inflation is ``the predominant risk'' facing the economy, rebuffing calls for a more balanced take that may have presaged a rate cut. Australia's bank today raised its benchmark to an 11- year high of 6.25 percent and European Central Bank President Jean-Claude Trichet on Aug. 2 signaled the ECB would raise its main rate by a quarter point to 4.25 percent next month.
The U.K. benchmark is the highest among the Group of Seven countries. The rate is 4.5 percent in Canada and 0.5 percent in Japan.
The Bank of England has lifted borrowing costs five times in the past year, and interest rate futures suggest the Bank Rate may rise to 6 percent by 2008. The implied rate on the December contract rose 0.07 percentage point today to 6.23 percent, while the March contract was at 6.25 percent, as of 2:50 p.m.
The contract settles to the three-month London interbank offered rate for the pound, which averaged about 15 basis points more than the central bank benchmark for the past decade.
Growth Forecast
``The bank appears to be leaving the door at least slightly ajar as regards another two rate hikes from here,'' said Richard McGuire, an economist at RBC Capital Markets.
The bank said its projection for economic growth was ``somewhat weaker'' than in May, when it forecast gross domestic product to expand an annual 2.8 percent in the second quarter of 2009. Charts published today suggest that growth may touch about 2.5 percent. The expansion will be slower than it previously estimated because of the rate increases, the forecasts show.
Britain's economy grew 3 percent from a year ago in both of the first two quarters of this year, stronger than most economists had forecast. In May, the bank expected growth to average 3 percent in 2008 and 2.8 percent in 2009.
``We are not convinced that a further increase in rates is necessary, as such a move would cause damage,' said David Kern, economic adviser to the British Chambers of Commerce, a business lobby group.
Risks `Diminished'
While ``upside risks'' to inflation have ``diminished somewhat,'' the bank pushed back by about a year the date when inflation will drop below the 2 percent target.
``The scope for further upwards pressure on commodity prices, the limited margin of spare capacity and the continued elevation of some measures of inflation expectations and pricing intentions mean that the balance of risks'' to inflation ``is judged to be slightly on the upside,'' the central bank said.
The Bank of England is weighing the risks to inflation as gains in commodity costs and faster domestic economic growth push prices higher. At the same time, turmoil in global credit markets has increased the cost of borrowing for companies while consumers are shouldering record debts.
The Standard & Poor's 500 Index posted its biggest monthly decline in three years in July and in the U.K., the benchmark FTSE 100 index has fallen 4.5 percent since July 16.
If the bank declines to move the key rate to 6 percent, inflation is unlikely to return to target, the forecasts show. The bank releases minutes of the Aug. 2 meeting in a week.
Inflation slowed to 2.4 percent in June, down from a decade high of 3.1 percent in March, the government said July 17.
Crude oil prices rose to a record $78.77 a barrel on Aug. 1. An outbreak of foot-and-mouth disease in English cattle may also drive up food prices in the next few months, adding to inflation pressures, economists at BNP Paribas in London said yesterday.
Source : http://www.bloomberg.com/apps/news?pid=20601087&sid=a.tjf.ZGe99E&refer=home
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