Bank raises rates by 0.25%

The Bank of England today nudged up interest rates by a quarter-point to 3.75%, in a bid to cool the housing market and prick the growing consumer debt balloon.

The first increase in the cost of borrowing for almost four years lifted rates from their 48-year low of 3.5% to 3.75%. Manufacturers will breathe a sigh of relief that the Bank's monetary policy committee (MPC) disregarded suggestions for a bigger, half-point increase.

That might have slammed the brakes on consumer spending and borrowing, but would have dealt a potentially devastating blow to a faltering manufacturing recovery.

Ahead of the MPC's decision, the chancellor, Gordon Brown, insisted that the government would assure continued stability whatever the Bank decided.

"It's my promise to the British people ... and it's my job to assure stability over the years to come," he told Sky television.

Anticipating the Bank's decision, Mr Brown said the interest rate cycle was expected to turn upwards globally.

"I think you'll find that in the euro area and in America the general expectation [about interest rates] is in that [upwards] direction," he said. "We've actually got the lowest interest rates and mortgage rates in 40 years. Even after today, they will be among the lowest we've ever had, whatever the decision the Bank of England is."

With today's monetary tightening, the Bank of England became the first of the world's leading four central banks to raise rates since the US Federal Reserve board began a global easing cycle in January 2001 as the world economy headed into a downturn. The question now is whether more interest rate rises are in the pipeline.

Douglas Williams, chief executive of the Centre for Economics and Business Research, said "Will consumers see the first rise in four years as the start of a trend, in which case they could cut borrowing and spending quite sharply and even cause the rate rise to be reversed next year? Or will they treat it as one off and do little to alter their behaviour. The paradox is that whatever consumers believe is likely to be the case is likely to prove self contradictory - if they believe rates will go up they won't need to and vice versa."

As far as the City was concerned, today's interest rate rise was a foregone conclusion. Recent data have shown robust growth in the services sector, as well as continued strength in house prices and record amounts in personal borrowing.

UK house prices rose 1.2% last month, the Halifax bank said yesterday. This was the smallest rise since June, but the annual growth rate remained high at 16.7% and the average house price now stood at ?137,000.

Halifax economists said that a small rate rise would have little impact on the housing market. Martin Ellis, Halifax's chief economist, pointed out that a 0.25% rise would add roughly ?4 a week to a typical ?80,000 mortgage, a figure most homeowners could easily handle.

Recent figures pointing to strong consumer demand and buoyant house prices followed last month's surprisingly close decision by the MPC to hold rates. At the time, four of the nine MPC members voted to reverse July's precautionary quarter-point cut to insulate the UK from the global downturn.

But since the July decision, revised figures have shown stronger economic growth than was previously thought. The Bank has also been taken aback by the continued willingness of Britons to spend and take on debt, despite the slower pace of income growth.

Unions and manufacturers, however, had urged the Bank not to go overboard on interest rates because of the still-fragile manufacturing recovery. Yesterday, data from the Office for National Statistics (ONS) showed that manufacturing output fell again in September for a second straight month.

Against this backdrop, the Trades Union Congress (TUC) called on the MPC to resist the urge to raise rates.

"The Bank must resist the bullying voices coming from the City and stand firm," said the TUC's senior economist, Ian Brinkley. "A rise now risks pushing the pound up to uncompetitive levels. This would be disastrous for anyone who works in the UK's manufacturing sector."

While acknowledging the case for a rise in rates, the Confederation of British Industry (CBI) urged the Bank to restrain itself to a quarter-point move. The CBI said the Bank had to avoid knocking any potential manufacturing recovery off-course.