British Interest Rates Up Full Percentage Point
British authorities pushed up interest rates by a full percentage point Thursday apparently to prevent the economy from overheating. The surprise move caused a record one-day decline in the London stock market.
After commercial banks hiked their base lending rate from 9% to 10%, the Financial Times index of 100 leading issues on the London Stock Exchange plunged 70.6 points to 2,246.8 on a wave of selling before recouping some of the losses to close 56.0 points down at 2,261.4.
The size of the decline was a record, outdoing the previous record fall of 46.1 March 30.
Major banks were driven to raise their lending rates when the nation’s central bank, the Bank of England, lifted its key money-market rate to 9 7/8% from 8 7/8%, a move apparently aimed at restraining inflationary pressures and a consumer boom that is sucking in imports. The central bank’s move was a strong signal to commercial banks that interest rates in the economy should rise, dealers said.
A rise in interest rates had not been expected before the release next week of Britain’s trade data for June.
Finance Minister Nigel Lawson said the move was aimed at keeping inflation low in the face of the country’s economic boom associated with the June election in which the Conservatives were returned to power.
“We have the fastest rate of growth of all the major countries in the world and we have inflation low--and I want to keep it that way,” he said. “It was right just to tighten monetary conditions a little bit by having interest rates up a point.”
But the news was met with gloom and uncertainty in the financial district, initially wiping about 6 billion pounds ($9.6 billion) off the value of London stocks.
Some financial analysts interpreted the action as an indication that forthcoming British economic data would be poor.
Foreign exchange dealers said the pound, which has fallen almost 9 cents against the dollar since mid-June, remained calm after the banks’ announcements, trading in a narrow range of $1.5710 to $1.5795.
In New York, the pound was quoted at $1.5770, off from the day’s high of $1.58, which was reached on the rate-hike news. Higher interest rates generally strengthen a currency, making it more attractive to hold as an investment.
The interest rise comes almost two months after Prime Minister Margaret Thatcher’s government won a resounding victory in the general election and pledged to cut income taxes and further reduce inflation, currently at 4.2%.
