Chief UK Economist for Barclays Capital David Hillier speaking on the One O'Clock News

Angry analysts who had almost unanimously predicted a rate freeze pointed to Confederation of British Industry figures that showed underlying retailers' sales growth was at a two-year low in May, showing there was little need to curb consumer spending.

Kate Barker, chief economic adviser at the Confederation of British Industry, said the CBI was "very concerned" by the rise and warned it had struck a fresh blow against exporters.

"Although there are some short-term worries about upward pressure on labour costs, our latest forecast indicated that the inflation target would have been met by the end of this year without this further turn of the screw," she said.

The strength of sterling has already hit exports

Dr Ian Peters, deputy director general of the British Chambers of Commerce, said: "The manufacturing sector is already in recession and with clear evidence of a slowdown in service sector growth, we believe this is a rate rise too far.

"Recent forecasts have suggested that the UK economy was set for a soft landing, today's decision will mean that many businesses will now face a rougher ride and it increases the serious problems facing our exporters.

"A clear signal that rates have peaked is now needed urgently."

Timely warning

Just before the announcement, investment group 3i told the City that it feared an economic slowdown in the UK.

The gloomy prediction by chairman Sir George Russell was sparked by a slump among British manufacturers' profits as a result of the strong pound.

Unions joined business in condemning the rise. TUC general secretary John Monks said: "This increase is as unnecessary as it is unexpected. It increases the risk of a hard landing and will hit investment and jobs."

Politicians blame Brown

Shadow Chancellor Francis Maude said the rise represented "a hammer blow for both homeowners and businesses."

Francis Maude: Government has failed to control inflation

Mr Maude added: "It is a direct result of the Government's inability to control inflation.

"This significantly increases the chances of the economy having a hard landing which will put a lot of people out of work."

Liberal Democrat Treasury spokesman Edward Davey said: "Today's interest rate rise will come as a blow to businesses and hard-pressed exporters. "The Bank has been forced into action because of the Government's unwillingness to target its fiscal tightening on consumers rather than businesses.