Borrowers hit with 0.25% loan rate rise

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The Independent Online

The Bank of England today hit borrowers with the first rise in interest rates in almost four years.

Improved economic conditions and renewed fears over levels of consumer debt prompted the 0.25% increase in the Bank's base rate to 3.75%.

City experts were unsurprised by today's decision, which they said was likely to herald the start of a series of upward moves in borrowing costs.

The Bank's rate had been at a 48–year low after nine cuts since early 2001, including a "precautionary" reduction in July of this year.

While homeowners now face higher loan payments – £15 extra a month on a £100,000 mortgage – some commentators said the Bank's Monetary Policy Committee could have gone as far as to raise rates by 0.5%.

In a statement, the Bank said a "modest increase" was necessary to keep inflation in line with the Government's target of 2.5%.

It added that household spending and the housing market had not slowed by as much as expected.

Positive economic data over the last month has seen a healthy 0.6% rise in third quarter GDP figures and continued buoyancy on the high street.

There was also confirmation on the re–acceleration of the housing market after the Nationwide reported prices rising at their fastest rate in a year.

Mortgage lending hit a new high during September as loans for buying a house totalled £25.7 billion in the month.

Hilary Cook, of Barclays Stockbrokers, said one of the Bank of England's main priorities was to bring about a gradual easing in the house market bubble.

She added: "This upward move is significant as it will make consumers think more about the debt levels they have been accumulating."

Today's increase could have a knock–on effect for high street retailers amid fears that customers will rein back on purchases in the run–up to Christmas.

Ms Cook added: "The consumer has kept the economy going very nicely during the tough times of the last two years. It's now time for the rest of the economy to take up the running."

Manufacturers had urged the Bank to sit tight over interest rates while the green shoots of a recovery in the sector take hold.

CBI director general Digby Jones described today's move as "understandable" but warned against the start of a swift upward movement in rates.

He added: "Despite more encouraging world growth, we should be clear that the economic recovery is still at an early and extremely fragile stage.

"It would be misguided to opt for overly aggressive monetary tightening before that recovery has really taken hold."

The view was echoed by David Frost, director general of the British Chambers of Commerce, who said: "This decision is acceptable when it is viewed as a reversal of July's precautionary cut of 0.25%, which took place at a time of greater uncertainty about the economy's health.

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