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Tuesday 02nd of December 2008
January 11, 2007

Bank of England raises interest rate to 5.25 percent


by Elaine Frei

In a surprise move, the Bank of England raised interest rates on Thursday, hiking the rate by 25 basis points from 5 percent to 5.25 percent. Most analysts had expected an increase in interest rates, but not until February. The hike spurred rumors that the UK consumer price inflation index for December will be higher than November’s level of 2.7 percent. Meanwhile, in the Eurozone, the European Central Bank let the interest rate there remain at its current level of 3.5 percent. Many analysts, however, interpreted the remarks from the ECB’s president that accompanied the announcement to mean that another rate hike could be coming soon, probably in March.

The rate hike by the Bank of England sent the sterling higher in currency markets. The UK currency was up 0.5 percent to $1.9410 in relation to the US dollar. Sterling was as high as $1.9538 versus the greenback at one point in the session, but news of fewer jobless claims in the US last week aided the dollar. The pound added 0.8 percent against the euro, to £0.6640, while it gained 1.3 percent to ¥233.90 in relation to the Japanese yen.

The euro, initially higher against the greenback, dropped 0.3 percent to $1.2895 versus the US currency. But the euro was stronger versus the yen, as the Japanese currency fell 0.4 percent in relation to the shared currency to ¥155.40. The yen was also lower versus the US dollar, dropping 0.7 percent to ¥120.50. The yen was hurt by new, weaker data. The leading indicator index in Japan fell to 20 in November, from 54.5 in October, news that substantially reduced the chance that the Bank of Japan will hike interest rates this month.

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