Aug. 2 (Bloomberg) -- The Bank of England left its benchmark interest rate at a six-year high today as policy makers assess whether five quarter-point increases in the past year are enough to quell inflation.
The Monetary Policy Committee, led by Governor Mervyn King, left the Bank Rate at 5.75 percent, the highest since April 2001, the central bank said today in London. The decision was predicted by all 60 economists surveyed by Bloomberg News.
The nine policy makers said at July's meeting, when they voted for an increase, that they planned to wait for new inflation and growth forecasts this month before deciding whether further moves are needed. Inflation has held above the bank's 2 percent target for a 14th month, while stock prices have tumbled as the U.S. subprime crisis spread to markets in Europe and Asia.
``The bank is going to want to give previous increases a chance to have an effect,'' said Dominic White, an economist at ABN Amro Holding NV in London who used to work at the U.K. Treasury. ``The likelihood is that the economy will hold up and that inflation may be more of a problem. Rates will probably go to 6 percent.''
The Standard & Poor's 500 Index posted its biggest monthly decline in three years in July, and the risk of owning corporate bonds rose in Europe by the most in at least three years yesterday as the fallout from subprime mortgage losses spread. In the U.K., the benchmark FTSE 100 index has fallen 5.8 percent as of yesterday's close since the bank's last decision July 5.
The FTSE 100 rebounded today, rising as much as 0.8 percent to trade at 6301.80. It reached a four-month low of 6186.20 on July 30.
Investor Speculation
The credit-market rout prompted investors to scale back speculation about further rate increases. The implied rate on the December interest-rate futures contract was 6.19 percent as of 3:39 p.m. in London, down from a peak close of 6.34 percent on July 17. 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.
The U.K. benchmark rate is the highest among the Group of Seven countries. It compares with 5.25 percent in the U.S., 4.5 percent in Canada and 0.5 percent in Japan.
ECB Decision
European Central Bank President Jean-Claude Trichet signaled that the bank may raise borrowing costs next month for the 13 euro countries after keeping its rate at 4 percent today in Frankfurt. Trichet pledged ``strong vigilance'' in fighting inflation.
King has led the push for higher interest rates in the U.K., securing an increase last month in a 6-3 vote after he was overruled in June. The majority at the July decision argued that the rate is now ``probably only just on the restrictive side.''
Whether borrowing costs rise again may depend on the Bank of England's quarterly assessment of growth and inflation prospects, due to be published Aug. 8. In May, the bank forecast inflation would return to the 2 percent target by the end of the year, based on investor expectations of higher interest rates.
The economy has shown few signs of cooling. Inflation was 2.4 percent in July after reaching a decade high of 3.1 percent in March. Economic growth accelerated to 0.8 percent in the second quarter from 0.7 percent in the previous three months. Both measures were faster than economists forecast.
Inflation Pressures
The pace of economic growth has encouraged companies to charge their customers more, adding to inflation pressures. Travis Perkins Plc, which sells building supplies, said yesterday that it increased first-half sales after raising prices. An index of factory-gate inflation reached a record in July.
``The economy's not slowing down as desired and that causes a risk for inflation,'' said Kenneth Broux, economist at Lloyds TSB Bank Plc in London. ``We're looking for no further change in rates, but there's a risk they could increase again.''
Policy makers arguing against higher rates last month cited the risk that the economy may slow ``quite sharply'' as consumers with record debts adjust to previous increases in borrowing costs.
There are conflicting signals as to whether a housing boom, which was encouraging consumers to keep spending, has started to slow. HBOS Plc, the U.K.'s biggest mortgage lender, said today that house prices rose at the fastest pace in three months in July. Other reports from Nationwide Building Society and Hometrack Ltd. signal prices barely increased. Retail sales rose in June by 0.2 percent, half the pace of the previous month.
Record Rainfall
Record rainfall and the worst floods in 60 years may also have hampered spending, while also threatening to raise food prices because of crop damage. William Morrison Supermarkets Plc, the fourth-largest U.K. food retailer, said July 19 revenue growth slowed in the previous two months as the rain deterred shoppers.
``There's enough interest-rate restriction in the pipeline to slow growth sufficiently to keep inflation in check,'' said Nick Bate, economist at Merrill Lynch & Co. in London who used to work at the Treasury. ``There are already signs of slowing in the consumer sector.'' He says rates have peaked.
Economists are split on the outlook for interest rates. Twenty-six out of 48 surveyed by Bloomberg News predict a quarter- point increase to 6 percent by November. The rest forecast no change.
``Growth figures are still fairly strong, and inflation hasn't been falling quite as fast as the Bank of England expected,'' said Ross Walker, an economist at Royal Bank of Scotland Group Plc. ``For the moment, we are still on course for another rise in interest rates.''
To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net
Last Updated: August 2, 2007 11:01 EDT
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