Bank of England signals further interest rate rise to check inflation

The Bank of England sent a clear signal yesterday that it was likely to raise UK interest rates again after the quarter-point rise to 4.75 per cent last week.

Its quarterly inflation report contained forecasts showing the bank expects prices to rise faster than its 2 per cent target for the next two years if it keeps its rates on hold. Only if it raises rates by another quarter point, as financial markets expect, would inflation fall back to target.

The British outlook over the next few months was for inflation to climb higher, the bank said yesterday as further increases in household gas and electricity bills compound the rises in petrol prices that have pushed inflation up from 2 per cent in April to 2.5 per cent in June. Mervyn King, the Bank of England governor, raised the prospect that he would soon have to explain the level of inflation and the setting of monetary policy to the British government for the first time since the bank was given independence to set interest rates in 1997.

If inflation moves more than one percentage point from the 2per cent target, the bank's governor must write to Gordon Brown, chancellor of the exchequer, explaining why inflation has increased or fallen to such an extent and what the bank proposes to do to ensure inflation comes back to the target.

Mr King put the chances of writing a letter at 50 per cent over the next six months. "It's odds on we'll have to write a letter in the next two years," he added.

Many economists reacted by raising their forecast of UK interest rates to 5 per cent by the end of the year. The money markets were unmoved since they had already priced in a rise in UK rates to at least 5 per cent by about the turn of the year.

• Meanwhile the dollar fell just shy of a two-month low against the euro yesterday, extending losses a day after the Federal Reserve halted its interest rate-rising campaign.

The dollar had surprised some with its resilience immediately after the Fed kept rates unchanged at 5.25 per cent, but with central banks in Britain and the euro zone likely to keep raising rates this year, the appeal of holding dollars was starting to diminish, traders said. - (Financial Times service, Reuters)