Interest rate increased by 0.25 per cent

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The Independent Online

Home-owners were hit with a hike in mortgage costs today after the Bank of England increased interest rates to 4 per cent.

The Bank's nine-member Monetary Policy Committee (MPC) opted to increase rates by a quarter of a point in a move that had been widely expected following encouraging economic growth and rising house prices.

It represents the first increase in the cost of borrowing since November, when the Bank lifted its base rate for the first time in almost four years.

If lenders pass on the full hike in rates, monthly repayments on a £65,000 loan will increase to £418.79 from £408.91, based on a new rate of 6 per cent. Abbey was the first group to announce it was passing on the hike to its borrowers, raising its standard variable mortgage rate by the full 0.25 per cent to 6 per cent from 9 February for new borrowers and 1 March for existing ones.

Economists say the rise was a near-certainty as the MPC attempts to keep a lid on inflationary pressures. The City expects rates to be at least 4.5 per cent by the end of the year.

Upbeat data in the last month has included the sharpest growth in high street sales since May 2002, while estimated gross domestic product (GDP) also increased by 0.9 per cent in the fourth quarter of 2003.

Other studies have shown upturns in manufacturing, services and consumer confidence.

Business lobby groups reluctantly acknowledged the need for a rise today, but warned that further rises could jeopardise the emerging upturn.

The CBI said business hoped the move will prevent more aggressive action later and ensure that rates peak at their lowest possible level.

CBI director-general Digby Jones added: "During the coming months, the bank must stick to a strategy that is well-signalled, well-explained and gradual. That is the way to ensure the stability business needs."

Manufacturing organisation the EEF said it accepted the decision "on the basis of longer term stability". But it warned that the recovery's strength was still uncertain and said it hoped the bank would "continue to tread cautiously".

EEF chief economist Steve Radley said: "The weakness of the dollar may take the steam out of any recovery and companies will hope this increase does not fuel further expectations of higher rates in the short term."

The British Chambers of Commerce called the MPC's decision "disappointing".Its director general David Frost said: "This rise is premature and is likely to hit recovery over the head before it gains momentum."

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