Bank surprises City by raising rates

The Bank of England today surprised the City by raising rates 0.25% to 4.25% amid concern that the lowest borrowing costs in 37 years have fuelled a spending boom.

The Bank had been widely expected to leave rates unchanged for the time being, given the dire state of manufacturing, which was underlined today when Westland helicopters announced job cuts of 950.

All 28 economists polled last week by the Reuters new agency expected rates to stay unchanged.

The monthly meeting of the Bank's monetary policy committee came against a backdrop of strong consumer confidence, with house prices continuing to soar and retailers reporting their best Christmas in five years.

The MPC cut rates seven times last year in a preemptive campaign to ward off recession in the world's fourth largest economy after the US began to slow down at the beginning of last year.

A combination of low interest rates and a boost in public spending will allow the UK to boast the highest growth rates among the G7 industrialised countries this year and last.

But while consumers have been spending as if there is no tomorrow, Britain's manufacturers have been hard hit by falling orders and declining profitability. In the latest case of manufacturing hardship, Westland Helicopter, owned by GKN Engineering, today annnounced 950 job losses because of fewer orders.

One trade union had called on the Bank for a further cut in rates, still the highest in the G7.

"The MPC must cut the interest rate by at least half a percent this month," said Roger Lyons, joint general secretary of the Amicus union.

Mr Lyons estimated that 200,000 jobs could be lost this year if the Bank did not cut rates further, but economists believe that rates are on their way up given the robust nature of consumer confidence.

"The strength of the consumer is having the effect of preventing further rate cuts in the UK," Deutsche Bank economist George Buckley said in a research note this week.