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Bank of England raises key rate

The new benchmark of 5.75% is a six-year high. The European Central Bank may follow suit.

July 06, 2007|From Bloomberg News

The Bank of England raised its benchmark interest rate to a six-year high Thursday, and the European Central Bank signaled that it might follow suit in coming months.

Borrowing costs are increasing globally as central banks, especially those in Europe, fight inflation fueled by the world economy's best performance in at least three decades.

In Europe, increases in prices and wages have been accelerating this year, said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group in London.

"There are more inflation risks than there were only six months ago," Cailloux said. "Rates will end up being higher than they might have been only a few months ago."

The British central bank increased its key rate Thursday by a quarter-point to 5.75%, saying "the balance of risks" to price stability still "lie to the upside."

In Frankfurt, Germany, the European Central Bank governing council kept its benchmark at 4%, a six-year high, but President Jean-Claude Trichet said policymakers had "no intention to change in any respect the present expectations of the market" for another rate increase in September or October.

So far, the rate boosts in the euro region and Britain are showing few signs of slowing economic growth or inflation.

The euro region's manufacturing and service industries grew at an unexpectedly rapid pace in June, and a British index of raw material prices held close to an eight-year high in June.

"We're running out of spare capacity, and central banks are right to slow things down," said Peter Dixon, an economist at Commerzbank in London.

In the United States, Federal Reserve policymakers say inflation is their predominant concern, but a housing slump has prevented them from raising their key rate from its current level of 5.25%.

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