Sterling soars after shock rate rise
By Edmund Conway, Economics Editor
Last Updated: 3:54am GMT 12/01/2007
Comment: Inflation warning lights are flashing red at the Bank
Analysis: Roger Bootle comments on 'exciting' day | Audio
Feature: Scare for City as price index catches alight
City eyes $2 pound | Calculate your personal inflation rate
Blow for homeowners | Mortgage caluculator
Bank of England's statement | Business reaction
The pound was catapulted to its highest level for almost seven years last night as traders scrambled to react to the Bank of England's shock interest rate decision.
The Bank's Monetary Policy Committee voted to raise borrowing costs by a quarter percentage point to 5.25pc in what analysts said was the biggest surprise it had delivered to the market since its independence a decade ago.
Not one major City economist saw the increase coming, and it caused turmoil in the equity and money markets. Stocks were boosted across Europe and North America in late trading after comments from Jean-Claude Trichet, president of the European Central Bank, which indicated that eurozone rates might not climb as high as feared.
The pound jumped to 105.1 points on its trade-weighted index, which is measured against a basket of other currencies. It is the highest level since spring 2000, showing how much money is pouring into sterling-based securities as the yield on the currency increases. Derivatives market Euronext Liffe said it had traded a record volume of sterling future contracts during the day, with 1.3m of the instruments changing hands.
The Bank's base rate has now risen to its highest level for almost six years and has increased by three quarters of a percentage point in five months.
In a statement released with the announcement, the MPC said: "Consumer Price Index inflation was 2.7pc in November. It is likely that inflation will rise further above the target in the near term, but then fall back as energy and import price inflation abate.
advertisement
"Relative to the November Inflation Report, the risks to inflation now appear more to the upside."
Economists said the MPC might have been swayed by December's CPI figures, which will not be released publicly until Tuesday but were available to the Bank's Governor, Mervyn King. His key concern is that wage bargainers increase workers' salaries to keep up with inflation. Consumers' perceptions of the rate of inflation have increased amid growing suspicion about whether the CPI reflects the costs faced by most households.
Recent data from employment groups has shown a marked rise in wage settlements over the past month.
Karen Ward, UK economist at HSBC, said: "If the committee are worried about headline inflation feeding into the wage round, it's better to hike rates in January than February. You can see why they would want this insurance with inflation above target."
Economists said the Bank was also worried by the continued rise in household debt, and its inability to bring house price inflation under control.
Businesses said the increase in borrowing costs, along with the jump in sterling, would cause misery for companies.
Adam Lent, head of economics at the Trades Union Congress, said the decision "smacks of panic". |
