British Interest Rates Raised Half a Point : Government Tries to Slow Consumer Spending With 4th Hike in Month

Britain raised interest rates on Tuesday for the fourth time this month in a renewed attempt to dampen a consumer spending boom that the government fears may cause sharply higher inflation.

The Bank of England raised its money market lending rate half a percentage point, to 9.5%. The rate is a key one at which the central bank lends to commercial banks, and the move was a signal to them to raise their base lending rates. They duly fell into line.

Britain last month slashed interest rates to 7.5%, the lowest level in 10 years. The worry then was that a surge in the value of the pound would make British goods too expensive on international markets.

But cheap credit meant that consumers, already flush with cash from income tax cuts that were introduced this spring, continued a spending spree that has sent retail prices and imports soaring.

Prime Minister Margaret Thatcher, whose government had cut the basic income tax rate by 2 percentage points to 25% in March, felt that it was time to brake a surging economy.

“The main reason for the interest rate rise was to make it quite clear that our overall objective of putting downward pressure on inflation remains and will be honored,” Thatcher said Tuesday.

‘Disappointing’ Figures

“It was thought that monetary conditions in any event were getting a bit loose, which was why there had been previous increases of half a percent at a time on the interest rates,” she told reporters at a European Community summit in West Germany.

A key signal of the problem, economists said, was Monday’s report of a record 1.21-billion-pound ($2.06-billion U.S.) current account balance of payments deficit. “The trade figures were very disappointing,” Thatcher said.

The deficit, which measures foreign trade and international payments for services, was double economists’ forecasts. They attributed it to lower exports and consumer spending on imports.

The interest rate move did not surprise investors. After Monday’s balance of payments news, most expected it--and London shares plunged on Monday, with the Financial Times-Stock Exchange index of 100 blue chips falling 29.8 to close at 1,841.5.

After the rate hike on Tuesday, the index firmed to post an 8.7-point advance to 1,850.2 by late afternoon.

Many investors had expected that Britain would raise interest rates as high as 10% after the balance of payments news, arguing that double-digit rates are needed to cool inflation.

“I think there’s still enough pressure around to push base rates up to 10%,” said Bob Semple, a market analyst at London brokers County Natwest.

But the opposition Labor Party has said Britain’s high interest rate policy is keeping the pound too high, running the risk of pricing British goods off foreign markets.

That could end up boosting unemployment, already at 8.7%, it argues.