Rates up to 4% and further 'gradual' rises to come

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The Independent Online

The Bank of England raised interest rates yesterday, putting businesses and homeowners on notice for further rises but insisting it would only act "gradually". The Monetary Policy Committee ordered a quarter-point rise to 4.0 per cent, saying it was needed to cool above trend economic growth and a sizzling housing market.

Although the decision had been widely forecast and expected, business organisations gave the move a mixed reaction. The TUC and the British Chambers of Commerce united in condemning the rise as "premature" but the CBI, the largest employers' organisation, said businesses "understood" the benefits of an early rise. David Frost, the BCC's director general, said: "The MPC's decision is very disappointing... and is likely to hit recovery over the head before it gains momentum."

A statement from the nine-member MPC said UK economic growth had become more "broadly based". "Output growth in the second half of last year was above trend and business surveys point to a further pickup in the first quarter. Household spending and borrowing have been resilient, and the housing market remains strong. Although sterling has appreciated, continued growth above trend means inflationary pressures are likely to pick up gradually over the next couple of years."

The focus shifted to how far rates would rise, and whether the UK would be able to sustain its record debt burden without plunging into recession. Matthew Wyles, a director at Portman building society, said: "Fasten your seatbelts - there will almost certainly be further increases during 2004."

Analysts said the message from the Bank was that the extent of future rises depended on whether consumers reined in their runaway spending and borrowing. Graeme Leach, the chief economist at the Institute of Directors, said: "[The Bank] wants to change consumer expectations and slow household spending, house price growth and debt accumulation. If they refuse to listen this economic cycle could get out of control."

Philip Shaw at Investec said there was little sign November's rate rise had had an impact. "It will take at least a couple more hikes to make any appreciable dent," he said forecasting a peak for rates at 5.25 per cent. But Roger Bootle, economic adviser to accountants Deloitte & Touche, said low inflation would act as a brake on monetary policy. "My view is that 4.25 per cent may prove to be the peak," he said.

There was further evidence of the strength of the economy. New car registrations rose 6 per cent in January while the demand for permanent workers rose at the fastest rate for more than three years last month. Mortgage companies reacted swiftly pushing variable rates to an average new variable rate of 6.0 per cent. This will mean borrowers with a 25-year £100,000 repayment mortgage will see their payments increase by £15.20 a month or £182.40 a year. The European Central Bank left rates on hold at 2 per cent.