MercoPress. South Atlantic News Agency

Bank of England raises interest rates to six year high, 5.5%

The Bank of England on Thursday raised interest rates by 25 basis points to a six-year high of 5.5% as expected. It's the fourth increase in nine months, lifting the benchmark interest rate to its highest level since April 2001.

The bank said in a statement that output growth had remained firm and that business investment was stronger than expected but cautioned about inflation risks in the medium term, which remains "tilted to the upside". '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,' the bank said. The rate hike is a bid to fight inflation which hit 3.1% in March, causing bank governor Mervyn King to write a letter to Chancellor of the Exchequer Gordon Brown to explain the situation. The letter was triggered after the consumer price index rose more than one percentage point above the government's inflation target of 2%. It was the first letter since the bank was made independent of the government 10 years ago just after Prime Minister Tony Blair assumed power. Blair yesterday announced his retirement at the end of June. '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,' the bank said. But it said the margin of spare capacity appeared limited and there were signs that price increases were being pushed through. 'Relative to the 2% target, the risks to the outlook for inflation in the medium term consequently remain tilted to the upside,' it added. Buoyant high street spending, a soaring financial services sector and an apparently unstoppable property market are some the factors fuelling inflation which has prompted the counter moves by the bank's nine-member Monetary Policy Committee. Still, inflation over the past decade has been lower than during any similar period since 1945. The widely-expected move comes on the same day the European Central Bank left basic rates on hold at 3.75%. Earlier in the week the US Federal Reserve opted to keep its interest rate at 5.25%, amid fears over the cooling housing market.