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Last Updated: Thursday, 5 February, 2004, 12:48 GMT
Bank raises interest rates to 4%
UK interest rates have been increased to 4% from 3.75% following the latest Bank of England meeting.

The move had been widely expected after recent economic data had shown the economy growing strongly.

The housing market is showing few signs of cooling, consumer spending in the High Street has remained strong and manufacturing has begun to recover.

Experts believe further interest rate rises will be needed later in the year to keep the economy from overheating.

The move will mean higher mortgage payments for homeowners.

Lending increase

If lenders pass on the full increase, monthly repayments on an average 65,000 mortgage will increase to 418.79 from 408.91, based on a new rate of 6.00%.

Abbey was the first group to announce it was passing on the rise to its borrowers, raising its standard variable mortgage rate by the full quarter percentage point to 6%

I may have to take a temporary job just to make ends meet
Daniel Yates

Barclays and Woolwich quickly followed suit, saying they were also raising their standard variable rate by the same amount to 6.04%.

Reactions from business lobby groups were mixed, with some reluctantly acknowledging the need for a rise, while others warned it may leave the current upturn in jeopardy.

The CBI said business hoped the move will prevent more aggressive action later and ensure that rates peak at their lowest possible level.

However, British Chambers of Commerce (BCC) director general David Frost said the rate rise was "disappointing".

"This rise is premature and is likely to hit recovery over the head before it gains momentum."

Exchange rate concerns

He added it was difficult to justify the rise, with inflation remaining below the government's 2% target and average earnings growth standing at 3.5%.

How will the latest interest rate rise affect you?

The Engineering Employers' Federation (EEF) said it accepted the decision on the basis of longer term stability, but reiterated its concerns about the potential impact on the exchange rate, particularly with the dollar.

EEF chief economist Steve Radley said: "Whilst manufacturers had not given the green light for an increase, they will understand this decision but hope the Bank continues to tread cautiously.

"The weakness of the dollar may take the steam out of any recovery and companies will hope this increase does not fuel further expectations of higher rates in the short term."

However, the TUC also denounced the move as "premature".

TUC chief economist Ian Brinkley said: "The Bank could have afforded to wait until it had confirmation that the expected recovery in manufacturing is actually happening."

The BBC's Evan Davis
"Saving is more attractive, borrowing more expensive"


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