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Last Updated: Thursday, 3 August 2006, 13:32 GMT 14:32 UK
UK interest rates raised to 4.75%
Interest rate movements
The Bank of England has increased interest rates by a quarter of a percentage point to 4.75% in an effort to keep inflation in check.

The surprise move marks the first change in borrowing costs in 11 months and the first increase in two years.

Experts were divided over whether the Bank's Monetary Policy Committee would move sooner or later to raise rates.

Inflation rose to 2.5% in June - above the government's 2% target - amid fears energy costs may force prices up more.

Interest rates also rose in the eurozone on Thursday. The European Central Bank announced a quarter-point increase - the fourth such hike in eight months - taking rates to 3%.

Earlier in the week, Australia raised its rates to 6%.

In the United States, the Federal Reserve has raised rates on 17 consecutive occasions to 5.25%, and it may do so again next week.

Even Japan, which has had near-zero interest rates, saw its central bank make its first increase in rates in six years last month.

Market reaction

The UK move surprised many analysts who were expecting policymakers to wait longer to assess the impact of rising consumer prices on the wider economy.

The decision sent stock share prices down more than 1% in London but led to a sharp rise in the pound against the dollar.

We had expected the MPC to hold off from raising rates until November
Howard Archer, Global Insight

The UK economy has been performing strongly, recording its strongest growth in two years between April and June, while the housing market has picked up significantly over the past year.

But spiralling oil prices and rising energy costs have raised the spectre of growing inflationary pressures.

The Bank's decision prompted a largely negative reaction, with manufacturing groups and unions being most vociferous in their criticism.

'Jumping the gun'

One economist described the action as a "precautionary" measure, saying it was designed to prevent further increases later this year.

Gas bills have soared this year

"We are surprised as we had expected the MPC to hold off from raising rates until November, given the ongoing significant uncertainties facing both the medium-term inflation and growth outlooks," said Howard Archer, chief economist at Global Insight.

"However, the majority of the MPC clearly took the view that precautionary action now would minimize the chances that more aggressive tightening of monetary policy will be needed later on."

Manufacturing group EEF criticised the move, claiming the move was premature at a time of growing economic and political uncertainty.

"The Bank has jumped the gun with today's decision," said its director general Martin Temple.

The decision was always going to be a close call
Richard Lambert, CBI director general

"Despite increases in energy and other costs, we have yet to see second round effects on the radar which would lead to a sustained increase in inflation." The Transport and General Workers union said the decision was "wrong" for British industry.

"It will do nothing to improve business confidence in an already beleaguered sector," said T&G official Peter Booth.

The CBI said businesses would be disappointed by the decision to increase rates.

"The decision was always going to be a close call," said Richard Lambert, the organisation's director general and former MPC member.

He added that he hoped the rise would "remove the risk of a more significant increase later in the year".

Find out why interest rates have increased

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