Interest rate rise stuns business

MILLIONS of home buyers face the threat of higher mortgage costs after the Bank of England raised interest rates yesterday in a move which outraged industry and caught the City by surprise.

None of the big mortgage lenders increased their loan rates immediately. Stiff competition in the mortgage market meant all were waiting for somebody else to make the first move.

However, costs could yet rise for borrowers who take out variable rather than fixed rate mortgages. An increase of 0.25 per cent would add about pounds 8 a month to the cost of a typical pounds 50,000 repayment mortgage.

The decision by the Bank's Monetary Policy Committee to increase rates by a quarter point to 7.5 per cent was the sixth such move since the election. It stunned the City, unions and businesses, and was greeted with a chorus of condemnation, although the Treasury hinted at its approval.

"This reinforces the consistent message the Chancellor has made in recent months that everyone must show greater responsibility in pay," said a Treasury source.

The Bank of England which has set interest rates since last May showed it was not afraid to take unpopular decisions, and after the Prime Minister's warning that private sector pay rises were too high, Downing Street said the move was absolutely right. Everything must be done to end the cycle of boom and bust, said the Prime Minister's spokesman. But the Tories were quick to exploit the rise. Tory central office paged Tory MPs at lunchtime with the message that the rise in interest rates "is another blow to householders". Francis Maude, the shadow Chancellor, blamed the Chancellor for the "hammer blow" to homeowners and businesses. He said it was a "direct result of the Government's inability to control inflation" and threatened to put more people out of work.

John Redwood, the Tory Trade and Industry spokesman, warned that interest rates may have to rise further to squeeze inflation out of the economy. "Wages are very buoyant - that is why the Bank was forced to act but we would not have started from here. We would be encouraging savings, not taxing them like the Chancellor."

The Liberal Democrats said the Bank of England was forced into action because of Gordon Brown's unwillingness to turn the screw on consumers. "Gordon Brown's botched budgets have helped created a Jekyll and Hyde economy - a 'booming' consumer sector and 'busting' manufacturing," said Edward Davey, the Liberal Democrat Treasury spokesman.

The Confederation of British Industry said it was "very concerned", and the Engineering Employers' Federation described its members as "horrified". Exporters blame the strong pound, which has hammered their profits and order books, on high interest rates. Union leaders were equally appalled. Ken Jackson, of the AEEU, warned that 200,000 jobs were under threat in manufacturing. Banks and building societies said the surprise blow would not help the housing market, coming as it did on top of the recent reduction in tax relief on mortgage interest payments.

Savers started to benefit yesterday, however. The Bradford & Bingley, raised the rates it pays on savings accounts and pledged to hold home loan rates unchanged until 1 August.

Signs the economy is slowing to a more sustainable rate of growth had persuaded the financial markets that the cost of borrowing had already reached its peak and would soon start to fall. But the Bank's statement warned that the uncertain economic outlook kept monetary policy "finely balanced".