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Highlights
As universally expected, the Bank of England increased its key interest rate to 5.5 percent from 5.25 percent. Previously, the Bank's monetary policy committee surprised market participants with increases in rates in both November 2006 and January 2007. Its interest rate compares with 5.25 percent in the U.S., 3.75 percent in the EMU and 0.5 percent in Japan.
The consumer price index, the Bank's inflation measure increased 3.1 percent on the year in March. The Bank of England has an inflation target of 2 percent. When inflation is 1 percent more or less than the target, the Bank must write a letter to the Exchequer explaining why this happened and what they propose to do about it. The Bank governor sent such a letter for the first time when inflation reached 3.1 percent. House prices continue to climb. According to the Halifax, house price increases eased to 10.3 percent on the year in April from 11.3 percent in the previous month. Employment continues at record highs while unemployment is at its lowest in 2 years thanks in part to the boom in financial services.
The Bank issued the following statement
"The Bank of England's Monetary Policy Committee today voted to raise the official Bank Rate paid on commercial bank reserves by 0.25 percentage points to 5.5%.
"In the United Kingdom, output growth has remained firm. Business investment has been stronger than expected and, although indicators of consumer spending have been volatile, the underlying picture is one of steady growth. Credit and broad money continue to grow rapidly. The pace of expansion of the international economy remains robust.
"CPI inflation picked up to 3.1% in March. Lower gas and electricity prices and weaker import price inflation mean that CPI inflation is likely to fall back to around the 2% target in the course of this year. But the margin of spare capacity in firms appears limited and there are signs that businesses are more able to push through price increases. Relative to the 2% target, the risks to the outlook for inflation in the medium term consequently remain tilted to the upside.
"Against that background, the Committee judged that a further increase in Bank Rate of 0.25 percentage points to 5.5% was necessary to meet the 2% target for CPI inflation in the medium term.
"The Committee's latest inflation and output projections will appear in the Inflation Report to be published on Wednesday 16 May.
The minutes of the meeting will be published at 9.30am on Wednesday 23 May."
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