Bank raises rates yet again

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The Bank of England annoyed business, caught the financial markets unawares and brought the next rise in mortgage costs a bit closer yesterday when it increased interest rates to their highest level for five years. But the ritual complaints could not disguise the fact that the Bank's move under the new arrangements was a gentle application of the economic brakes. The Bank of England's Monetary Policy Committee pushed interest rates a quarter point higher to 7.25 per cent yesterday, the fifth increase since 1 May. The cost of borrowing is now at its highest since the aftermath of the exchange rate crisis in 1992.

Even so, the big lenders held off increasing mortgage rates yesterday after the Nationwide and the Bradford and Bingley, the two biggest remaining mutual building societies, flung the gauntlet down to their competitors by promising to keep their loan rates unchanged at just under 8 per cent for now.

Brian Davis, chief executive of the Nationwide, said: "We can afford to let borrowers enjoy Christmas." But he warned that the society would probably have to follow the Bank of England's lead if it raises rates again in the New Year.

Many City analysts were surprised by yesterday's move because they had expected the recent stockmarket turbulence to delay the rise in rates. Some reckoned, too, that policy was already tight enough to slow the economy to a steadier pace.

But the Bank's statement concluded another "modest" move was needed to keep underlying inflation on course for 2.5 per cent. It said the economy had been growing at an unsustainable rate.

Business reaction to yesterday's increase ranged from "slightly disappointed" to "concerned". Andrew Higginson, chair of the British Retail Consortium's economics committee, said: "It was a rise too far." There was no sign of overheating on Britain's high streets, he said.

The CBI expressed regret about the Bank's decision, but chief economist Kate Barker acknowledged that the tight jobs market did raise concerns about future inflation pressure. The Bank's announcement pointed to evidence of skill shortages as one reason for its decision.

The loudest complaints came from exporters, alarmed that high interest rates are keeping the pound painfully strong. Graham Mackenzie, director general of the Engineering Employers' Federation, said: "Exporters, already suffering reduced margins and loss of market share, will continue to be hurt."