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. Last Updated: 07/27/2016

Empowered English Bank Considers New Rate Hike

LONDON -- The Bank of England, which has been given freedom to set interest rates by Britain's new Labour government, said Tuesday that rates would have to rise again soon to keep inflation down.

In its quarterly Inflation Report, it said that despite last week's increase in official interest rates from 6.0 percent to 6.25 percent, further action was needed to dampen surging economic growth.

"Output growth in the U.K. is now above trend and rising," the central bank said.

"Inflation is close to the target and falling. That happy combination is, however, unsustainable. At some point, above-trend growth will lead to rising inflation." The bank added: "On the present evidence, there is still likely to be a need for some further moderate tightening of policy in the months ahead."

Chief economist Mervyn King said the bank would have to "seriously consider raising interest rates in the coming months," but he declined to indicate when or by how much.

Chancellor of the Exchequer Gordon Brown last week astounded financial markets by giving up one of the most jealously guarded powers of his office and ceding the right to set interest rates to the Bank of England.

Previously, the bank merely advised the chancellor, who was free to, and often did, ignore its recommendations.

From next month, a new monetary policy committee at the bank will be responsible for setting interest rates to meet an inflation target set by the government.

Brown has adopted the target of 2.5 percent or less set by his Conservative predecessor Kenneth Clarke, and is expected to confirm the target at the Mansion House speech to Britain's financial community scheduled for June 12.

The bank said the strength of the pound against other major currencies had dampened inflationary pressures by making imported goods cheaper, but it warned that the benefit would be temporary. "Despite the rise in the exchange rate, inflation is more likely than not to be above the target two years or so ahead unless action is taken to slow the pace of expansion," the bank said.

"That is why the bank has argued for several months that a tightening of monetary policy was necessary."