Britain Hikes Interest to 14% to Bolster Pound

Britain raised its interest rates today to defend the battered pound in a move that market analysts said could forestall any reduction in U.S. rates.

The Bank of England, the central bank, sought to protect the pound against a surging dollar and crack down on one of the highest inflation rates in West Europe by lifting its money-market lending rate by 1 percentage point to 14%.

Commercial banks quickly fell in line with similar rises in their base lending rates to 14%.

“The pressures were such that they didn’t have much choice,” said economist Peter Fellner of stockbrokers James Capel, after the government’s 10th rates rise in a year.

Bond market traders in the United States said the move, if followed by other countries, would help reduce pressure on the high-flying dollar and could stop any reduction in U.S. rates.

Due partly to the unwanted strength of the dollar, some economists have predicted that the Federal Reserve will loosen its yearlong tight grasp on rates. A high dollar makes U.S. goods more expensive abroad, making it more difficult for the United States to reduce its huge trade deficit.

Higher rates abroad would serve the same purpose, without increasing U.S. inflationary pressures.

British currency and share markets were jittery after the increase, which followed a bout of pound-selling on the foreign exchanges because of gloom over Britain’s 8% annual inflation rate and the dollar’s resiliency against repeated central bank intervention.

Industrialists warned that output could suffer, while the opposition Labor Party said the Thatcher government clearly cannot handle the economy and inflation, now at a seven-year high.

“High interest rates run the risk of recession and they make life harder for British people and British industry,” said Labor spokesman John Smith.

Prime Minister Margaret Thatcher told a meeting of Conservative supporters: “We need a period of high interest rates to bring inflation down. And while the effects can be uncomfortable, the effects of continued high inflation can be much worse.”