Interest rates rise to 4.75%

The Bank of England today stuck to its "gradualist" policy as it raised interest rates by a quarter-point to 4.75%, its fifth increase since November.

The quarter-point rise was widely expected amid signs that the Bank's incremental approach was having some impact on the buoyant housing sector.

In a statement, the Bank said: "Output growth has been robust and business surveys point to continued expansion. Although the housing market remains buoyant, there are now signs that it is starting to ease, and the growth of consumption may be moderating. Investment and public sector consumption have both grown strongly and demand in UK export markets continues to pick up."

The Halifax bank yesterday reported that the monthly increases in property prices had eased during the past two months. The Halifax said prices rose by 1.3% in July following a 1.2% increase in June, well down on the 2%-plus rises earlier in the year.

The Bank's monetary policy committee (MPC) does not target house prices as such but is worried that an unsustainable property boom could result in a crash that would have repercussions for the wider economy.

Some economists have argued that it would take a 50 basis point rise to really slow down the housing market and curb consumer borrowing, which last month broke the ?1 trillion mark.

The National Institute of Economic and Social Research (NIESR) last week criticised the Bank's "gradual approach" as an ineffective way of keeping inflation in check.

"This rather leisurely tightening of monetary policy ... will have done little to ensure that inflation is not expected to rise sharply," said the NIESR, as it urged the Bank to raise borrowing costs by a half-percentage point.

But Bank officials have made it clear their preference for a gradual approach. Charlie Bean, one of the nine MPC members, said last week there was no evidence that "a single large increase in rates" was more effective in damping down consumer spending than two smaller hikes. The Bank was "not in the business of trying to clobber the consumer, Mr Bean said.

"We suspect that there was serious discussion within the MPC about a 50 basis point interest rate hike. It is likely that the minutes of the meeting will strongly hint that a further 25 basis point hike will occur in September unless there is very clear evidence over the next month that the housing market really is now cooling and that consumer borrowing and spending is moderating," said Howard Archer of Global Insight.

Manufacturing data released this morning will probably have reinforced the MPC's gradualist leanings. Manufacturing output unexpectedly fell in June, although the three-month growth rate remained positive, the Office for National Statistics reported.

The ONS said manufacturing output fell 0.7% on the month in June, on the back of significant drops in output of the basic metals and transport equipment industries, after rising sharply in April and May.

Industry surveys have also showed a slowing of growth in the manufacturing sector in June, but a strong recovery in July. The Chartered Institute of Purchasing and Supply manufacturing survey showed the sector growing at its fastest pace in 10 years in July.