Bank of England Hikes Key Interest Rate Again, Fifth Time This Year

LONDON -- The Bank of England raised its key interest rate Thursday by a quarter of a percentage point to 5.75 percent, the fifth increase this year, in an attempt to curb inflation.

The widely expected move puts rates at a six-year high as the central bank struggles to contain rising prices and a booming housing market.

Consumer price inflation peaked at 3.1 percent in the year ending in March, the highest level since the Bank of England was put in charge of setting interest rates.

That triggered a requirement that Bank of England Governor Mervyn King write a letter of explanation to the government, which has a 2 percent target. Inflation has moderated since March, but was still at 2.5 percent in the year ending in May.

The housing market also continues to grow, although there are signs that it is expanding at a slower pace.

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The bank's monetary policy committee said that inflation is likely to continue to fall to its 2 percent target over the rest of the year.

However, it added that "the balance of risks to the outlook for inflation in the medium term continued to lie to the upside."

"Against that background, it further judged that an increase in the bank rate of 0.25 percentage points to 5.75 percent was necessary to meet the 2 percent target for CPI inflation in the medium term," it said.

The announcement leaves Britain with the highest official rate among the world's seven wealthiest nations.

The Bank of England's decision was widely expected — anticipation of the decision drove the pound to 26-year highs above $2. The announcement gave the pound another slight push, lifting it to $2.02, its highest since mid-1981, before it settled back slightly to $2.0190 in early afternoon trading.

"Despite some tentative signs that higher interest rates may be starting to dampen consumer spending and slow the housing market, significant upside risks to longer-term price stability persist from firms' pricing power, excessively buoyant money supply growth and possible capacity constraints amid ongoing healthy growth," said Howard Archer, chief U.K. and European economist at Global Insight.

"Furthermore, there is still a risk that pay could move significantly higher over the coming months, even though wages have remained broadly contained so far."

Archer added that the bank's statement gave few clues about future interest rate movements.

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