Interest Rates: Business complains of 'surprising' decision: Industry lobby stung by 'unusual move' and warns against further rises that could hit confidence

BUSINESS leaders were dismayed by yesterday's rise in base rates, which represented a defeat for industry lobbying against an increase in the cost of borrowing.

Howard Davies, director-general of the Confederation of British Industry, called it 'an unusual move' and said that the CBI would be watching carefully in the coming weeks for signs that business confidence had been damaged.

Last Thursday, Mr Davies urged the Bank of England to hold off on an interest rate rise for some time because of evidence that high street spending was slowing down. He said yesterday: 'This move in itself is unlikely to damage the healthy recovery we are now seeing.' But he added that inflationary pressures and the housing market remained weak. 'We would not like at this stage to see rates rise much further.'

Tim Melville-Ross, director-general of the Institute of Directors, thought the pace of economic recovery could slow down. 'Our members will be surprised and disappointed by the increase in base rates, since our view is that the inflationary influences are well under control.'

John Monks, general secretary of the TUC, criticised the increase in almost exactly the same words.

The British Chambers of Commerce had a harsher reaction. Richard Brown, deputy director general, said the rise could sabotage recovery. 'It will have a harmful effect on business and consumer confidence,' he said. Profits would be eroded, with smaller retailers likely to be particularly severely affected.

The CBI's survey of distributive trades - retailers, wholesalers and motor traders - published last week showed a marked slowdown in sales on the high street last month. Official figures on retail sales for August are due to be published on Thursday.

The construction industry, emerging from one of its worst recessions, also condemned the move. Hugh Try, chairman of the Building Employers' Federation, said: 'Confidence among those planning to invest in construction projects will inevitably be damaged.'

A few businessmen thought their companies would not be much affected. John Poulter, chief executive of the electrical engineering group Fairley, said: 'It was an adjustment for financial markets which is unlikely to feed through to us grubby industrialists.'

The Forum of Private Business, representing more than 22,000 small firms, calculated that the cost of the rate rise for the average small business, with borrowings of pounds 22,000, would be less than pounds 2 a week. Stan Mendham, its chief executive, argued that a half point rise in base rates now was 'preferable to a heavy dose of agony in the future'.