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Bank of England boosts key interest rate

January 12, 2007|From the Associated Press

Worries about creeping inflation spurred the Bank of England to make a surprise increase in its main interest rate Thursday, while the European Central Bank held steady but hinted at an increase of its own to come.

The Bank of England lifted the key rate from 5% to 5.25%, its highest point since May 2001, despite expectations for no move. Policymakers in Britain are concerned about rising inflation rates, which reached 2.7% in November -- above the bank's target of 2% for the seventh month in a row.

British interest rates are now level with those in the United States. The increase makes mortgage and loan repayments more expensive.

The ECB, meanwhile, left its benchmark rate unchanged at 3.5%, but President Jean-Claude Trichet's comment that it would engage in "very close monitoring" of inflation risks was taken by most analysts as a signal that a quarter-point hike could be in the cards for March.

Annual inflation in the euro zone was at 1.9% in December, just below the ECB's target of about or below 2%.

"Frankfurt clearly is a less hectic place than London," said Holger Schmieding, Bank of America's chief economist for Europe. "Whereas the Bank of England shocked observers like us with a surprise rate increase today, the ECB calmly confirmed expectations that it will raise its rates again by [a quarter of a percentage point] in March."

By waiting, the bank -- which sets policy for 13 nations with more than 316 million people and a combined gross domestic product that accounts for more than 15% of the world's economy -- allowed itself to get a better picture of the effect of a value-added tax increase in Germany and see more fourth-quarter gross domestic product data.

The German government announced earlier Thursday that the nation's economy -- Europe's largest -- expanded by 2.5% in 2006, its fastest rate since 2000. The Eurostat statistical agency said economic growth in the euro zone slowed in the third quarter of 2006, but full-year figures were not yet available.

The ECB's forecasts for euro zone growth this year are 1.7% to 2.7%, up from 1.6% to 2.6% issued last year.

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