BoE expected to hike rates soon

LONDON, England -- The Bank of England may begin raising interest rates again as economic growth gathers steam and inflationary pressures mount.

The BoE's Monetary Policy Committee said on Wednesday that growth could rise next year above a sustainable rate, while inflation is expected to edge ahead of the central bank's target level.

"The central projection is for growth to recover to above trend rates as stronger world demand and higher public spending outweigh a modest easing in household spending growth,'' the MPC said in its quarterly inflation report.

The UK economy was stagnant in the last quarter of 2001 and grew by just 0.1 percent in the first quarter of this year.

The MPC report said the economy had come out of the "trough of the current cyclical slowdown" and there are signs of a significant recovery in the second quarter of 2002.

Inflation is currently running at 2.3 percent, just below the BoE's target of 2.5 percent. But the report said there indications the rate could rise to 2.6 percent over the next two years.

"The committee would take action to ensure that the inflation target was met,'' the BoE's Deputy Governor Mervyn King told a news conference.

The BoE's key rate is at a 38-year low of 4 percent. It has not adjusted the rate since November after reducing seven times in one year in a concerted effort among major central banks to lower borrowing costs to help economic recovery.

"Despite the recent dovish comments from MPC members, the inflation report is much more hawkish than had been expected. This is the nearest the MPC comes to a tightening bias,'' John Butler, an economist at HSBC, told Reuters.

But many economists are not expecting a rate hike until at least July.

"Overall, while the report suggests that the committee is starting to think about raising interest rates at some point, it by no means suggests that a hike is imminent,'' said Jonathan Loynes at Capital Economics.