More rate pain for borrowers

THE Bank of England's decision to raise interest rates by a quarter percentage point to 4.75% should surprise no one.

The increase, the fifth of its kind since November, demonstrates the 'little-but-often' philosophy outlined last week by the Bank's chief economist Charles Bean, who argued that a gradual upward incline is better than clobbering the consumer with one big rise.

It will be interesting to see whether a half-point increase was discussed, when the minutes of the meeting are published.

Most economists are already looking ahead to when the next increase will come, with some influential figures believing it will be as early as next month. The consensus in the Square Mile is that rates will continue going up to a peak of 5.5%.

The Bank's Monetary Policy Committee pointed to strong economic growth as the motive for yesterday's increase.

So far, its gradual approach to rate rises has not had any great impact on runaway house prices, or on Britain's gargantuan £1 trillion collective debt, though the committee notes signs that the buoyant property market is finally starting to ease.

Concerns over oil prices are also bound to have loomed large in the minds of the committee members.

Oil climbed back to a fresh high following a brief respite when the Opec producers' cartel reassured the market that it could add to supplies if need be.

Prices have risen by more than 25% since their average value in 2003 and are nearly double their average value in the 1990s, according to the National Institute of Social and Economic Research.

As the institute points out, the oil price is playing an important role in the build-up of inflationary pressures around the globe.

In its July review, its analysts estimate the recent rise will raise inflation in the US by 0.4 percentage points and 0.3 points in the euro area.

Britain is to some extent shielded from the effects of rising oil prices. That is partly because the pound has been strong against the dollar, the international currency of the oil markets. We are also still a net exporter of the black stuff.

To put the situation in perspective, oil is nowhere near its peak of the 1973 crisis if you strip out inflation - it would have to get up to around $100 a barrel for that.

There is, however, no room for complacency.

Mervyn King, the Bank of England governor, has no intention of repeating the mistakes of the past, when loose monetary policy led to high inflation and unemployment that blighted the 1970s and the 1980s.

The City will be scrutinising next week's Inflation Report from the Bank with eagle eyes to divine the timing of the next move on rates.

Sooner or later, though, it looks like more pain for borrowers.

New era for Barclays

MATT Barrett, the outgoing chief executive of Barclays, is unlikely to be much troubled by the controversy over his bank's record £2.4bn profits.

Other bank bosses are bruised by suggestions they are making too much money at the expense of their customers.

But Barrett seems to have relished the reactions to his former topless model ex-wife, his pay and his frank declaration that he never borrows on Barclaycard because it is too dear.

Besides livening up the banking scene, Barrett has also transformed Barclays from a near basket case into a credible, confident institution.

So what can shareholders and customers expect from his successor, John Varley, who takes the reins next month?

Varley's appointment comes at a time when the sector is gripped by merger fever sparked by the bid for Abbey by Spain's Banco Santander.

The new boss insists on remaining Sphinx-like on whether he might launch a counter-bid for Abbey.

He is equally silent on whether he would entertain a Yankee suitor such as Citigroup or Bank of America, after speculation of a US deal sent the shares up sharply earlier this week.

Instead, Varley is highlighting his plans to grow the bank under its own steam.

He believes the bank is too dependent on the highly-regulated UK market, where the core banking division grew only 6% in the first six months of the year, and opportunities for high growth are limited.

More could be achieved, he reckons, by expanding the investment banking and fund management businesses overseas.

He also hopes to export Barclaycard to markets such as Germany, where only 20% of households have credit cards - possibly because, unlike millions of Britons, they are canny enough to know Matt Barrett is quite right.

But despite Varley's brave declarations of independence, many in the City are still hoping for a bid.