Markets stunned at BoE interest hike

The Bank of England Thursday sent a flummox wave in the market by unexpectedly raising its benchmark interest rate by a quarter of a percentage point to 5.25 percent. This was the third time the Bank had lifted its interest rate, since August.

The move was unpredictable and analysts had widely expected the rates to stay unwavering this month. The policy makers are concerned about inflation which rose to 2.7 percent in November, well beyond the 2.0 percent target.

The astounding decision to increase the interest stems from concerns about higher prices, as policy makers said inflation may further rise and encourage demands for higher wages. Risks of faster inflation “now appear more to the upside,” the bank said in a statement. The pound went up and bonds descended down.

According to economists, more rises could be on the cards.

"The margin of spare capacity in the economy appears limited, adding to domestic pricing pressures," the BoE said in a statement.

Ian McCafferty, chief economist at the Confederation of British Industry, doubted if the increase in rate will have the desired effect of reducing the wages. "Unless wage settlements pick up steeply in coming months, inflation is set to fall back towards the Bank's midpoint target of 2 percent during the second half of 2007. The economy is already expected to slow over the course of the year," he said.

The BoE had never raised interest rate in January since 2000. At that time, the economy was rising at a 4.3 percent annual rate and the FTSE stock index was near a record.

The pound soared to $1.9510 versus the dollar from $1.9331. The benchmark FTSE 100 Index lost as much as 0.4 percent from yesterday, wiping out the gains made earlier, as shares of homebuilders fell.