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Last Updated: Thursday, 5 August, 2004, 11:00 GMT 12:00 UK
Bank lifts interest rate to 4.75%
Bank of England
Rates have risen five times since November
The Bank of England has raised its base rate by a quarter of a percentage point to 4.75%.

The move, widely predicted by analysts, comes amid evidence of accelerating economic growth which could fuel inflation in the months ahead.

The rate rise will also be seen as an attempt to cool the UK's booming property market, and rein in soaring consumer debt.

The Bank has now pushed through five quarter-point rises in eight months.

The increase in rates means higher repayments for businesses and consumers who have borrowed money, including Britain's millions of mortgage holders.

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Each quarter point rise adds about 10 to the monthly repayment on an average 65,000 variable rate mortgage.

Rising rates also mean that savers will get better returns on the money they put aside.

Easy does it

Business groups said the latest increase would hamper British companies' performance, and called on the Bank to hold fire in the months ahead.

"Interest rate overkill would have damaging consequences," said David Frost, director general of the British Chambers of Commerce.

Aside from the impact of higher loan repayments, businesses fear that rising rates will increase the value of sterling against other currencies, making their goods more expensive in export markets.

The cost of servicing debt is still relatively low
John Butler, HSBC

Manufacturers' association EEF said Thursday's rise would put added pressure on companies already facing higher costs because of soaring oil prices.

"Manufacturers will now expect a pause for breath to assess the impact of the recent rises at a time when they are faced with rising costs for energy and other raw materials," EEF Director General Martin Temple said.

Debt burden

In a statement accompanying its decision, the Bank said that with output running at a high level, "continued strong growth is likely to lead to inflationary pressures."

The UK economy expanded at a better-than-expected 0.9% in the April to June quarter, while inflation rose to 1.6% in July from 1.5% the previous month, according to the latest official figures.

The Bank of England's brief is to ensure that inflation falls within one percentage point in either direction of the Treasury's target rate of 2%.

Recent economic data also suggest that previous rate increases this year have had little impact on household spending and borrowing.

Retail sales rose by 1.1% in June, and total consumer debt - fuelled in recent years by historically low interest rates and high employment levels - breached the psychological 1 trillion barrier last week.

While there have been signs that the UK's 10-year property boom is cooling, the most closely-watched surveys show that house prices are still rising, albeit more slowly.

Soft landing

The Bank of England is concerned that unless house prices are brought under control, the market could crash, choking off consumer spending and triggering a full-blown recession.

It also fears that high levels of household debt have left consumers vulnerable to economic shocks, such as a sudden rise in unemployment, which would make it more difficult for them to repay what they owe.

The Bank said on Thursday that there was some evidence of a slowdown in the property market, and in the rate of consumption growth.

Analysts said the latest interest rate rise would not in itself inflict pain on borrowers.

"Debt servicing costs will rise, but the cost of servicing debt is still relatively low. It shouldn't cause the consumer or the housing market to suddenly collapse," said John Butler, economist at HSBC bank.

Most economists expect rates to rise again before the end of the year.

The BBC's Evan Davis
"The Bank of England is getting very predictable"

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