Bank lifts interest rates to 4.5%

The Bank of England has increased interest rates by a quarter of a percentage point for the second month in a row, taking them to 4.5%.

The move is the Bank's latest attempt to rein in consumer spending and cool down the housing market, which has so far been resistant to rate increases.

In addition to buoyant house prices, data shows retail sales are growing and the manufacturing sector is recovering.

The rise comes despite the fact that inflation remains below the 2% target.

Many analysts in the City had predicted another rate rise.

VOTE RESULTS Where do you think rates will be in a year's time? Lower than today 2% No different 3% 5% 29% 6% 46% 7% 10% 8% or above 10% 48498 Votes Cast Results are indicative and may not reflect public opinion Vote now closed

The Bank adjusts interest rates in order to either tame inflation or stimulate economic growth.

Analysts say the presiding concerns at present are rampant house prices and the high level of consumer debt.

Data released by mortgage lenders since last month's rate decision have suggested no slowdown in the housing market.

The UK's largest building society, Nationwide, said its prediction of 15% annual house price growth this year could be an underestimate.

Meanwhile, the Halifax's latest survey showed prices jumped by 2.2% in May, with property values up 20.4% on last year.

The spectre of a house market crash has been highlighted by economists and international organisations such as the IMF and OECD as one of the biggest risks facing the UK economy.

Roger Bootle of Capital Economics would have favoured an even more hawkish approach to interest rates this month with a half point increase to 4.75%.

He recently told MPs that shock treatment was needed because the three quarter-point rises since November had had little impact on house prices and spending.

Sound economy

Aside from the concerns over house prices, recent economic figures suggest the UK economy is growing strongly.

There is a danger that excessive rate rises will damage the manufacturing sector and yet fail to bring the housing market under control British Chamber of Commerce

Manufacturing figures released on Wednesday showed output in April rose by the fastest rate since August 2002, while UK retail sales grew at their fastest pace in more than two years in May.

Spending is also expected to pick up as the warm weather and the Euro 2004 football tournament kick in.

The British Chambers of Commerce (BCC) said business was "not surprised" by the decision but warned that companies needed a stable environment to prosper and urged the MPC to stick to its gradual approach.

"We are aware that moderate rate rises may be necessary if inflationary risks persist," the BCC said.

"But there is also a danger that excessive rate rises will damage the manufacturing sector and yet fail to bring the housing market under control."

The EEF manufacturers' organisation did not welcome the rise but added: "Manufacturers understand that this may be the short-term price to pay for greater economic stability in the longer-term."

The financial markets expect UK rates to reach 5% by the end of the year.

Homeowners braced

The rate rise means millions of Britons are facing more expensive mortgage repayments as lenders prepare to up the cost of borrowing.

The MPC's decision will cost homeowners with an average £65,000 mortgage just over £10 a month.

Since rates started to go up in November, the average mortgage has become £40 dearer.

Rates remain very low in the context of the last 30 years, Martin Ellis, Halifax

Internet and telephone bank First Direct was the first mortgage lender to announce it was putting up its rates, followed by Abbey. Both will pass on the full quarter point increase.

On the plus side, people with savings accounts will be celebrating the latest rate rise - Egg, First Direct, HSBC and Abbey will be increasing savings rates over the next few weeks.

All the major lenders, including Halifax, Nationwide, Cheltenham & Gloucester, Abbey National and Barclays are currently reviewing their rates.

The Council of Mortgage Lenders warned: "This rate rise is unlikely to be the last, and borrowers should arrange their finances to be able to cope with moderately higher rates over the coming year or so."

The chief economist at Halifax, Martin Ellis, was more upbeat: "There is no chance of a crash. What we have seen is a very modest increase in rates and rates remain very low in the context of the last 30 years."