Loans shock as Bank raises rate to 5.25%

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The Independent Online
THE BANK of England sprang an unexpected rise in interest rates on home-buyers and businesses yesterday, the first for 15 months. The Monetary Policy Committee announced a quarter-point increase to 5.25 per cent, to a chorus of criticism from industry.

Prompted by signs of excess in the housing market, the decision set off another skirmish in the bitter mortgage war. The Nationwide, the biggest mutual lender, stuck to a pledge not to raise its loan rate from 6.45 per cent. But Halifax, the country's biggest lender overall, raised its standard variable mortgage rate by 0.14 points to 6.99 per cent, despite having failed to pass on the last Bank of England cut to its borrowers in June.

The Halifax move will add pounds 5.04 a month to an average pounds 60,000 repayment mortgage with the company, taking the monthly payment to pounds 411.19. This compares with pounds 437.19 at the start of the year. "The affordability of housing is still high and we will remain competitive," a Halifax spokesman said:

Many lenders followed suit but others were considering their next move. The Treasury has been keeping an eye on mortgage levels since June, when most lenders failed to pass on the benefits of the last reduction in interest rates.

City economists warned that the Bank of England is likely to raise rates further during the next few months. "If the aim is to cool the housing market, they could have to go quite a bit further," said Adam Cole of HSBC, an investment bank.

The Royal Institute of Chartered Surveyors welcomed the Bank's move, saying it would improve the prospects for stability in the property business.

Likewise, the Council of Mortgage Lenders said yesterday's decision was unlikely to harm the housing market. "A small rise now is preferable to allowing any inflationary pressure to build and for a subsequent bigger rise to be needed," said Michael Coogan, its director general.

This was the MPC's explanation too. A statement said the committee concluded "an early move could lower the level at which interest rates might otherwise need to be set".

But business organisations and unions bitterly condemned the move, which came on the day it emerged that employment in manufacturing in the UK has fallen below 4 million. The pain in industry was increased as the pound jumped on the foreign exchanges in reaction to the surprise Bank of England decision.

Manufacturing decline, Business, page 20