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Last Updated: Thursday, 10 May 2007, 11:37 GMT 12:37 UK
UK interest rates raised to 5.5%
Bank of England rates graph
The Bank of England has voted to raise interest rates by a quarter of a percentage point to 5.5%.

The increase, the first since February, takes the cost of borrowing to its highest level since 2001.

Analysts had widely expected the rise as the Bank battles to rein in inflation and cool consumer spending.

Business and employers groups accepted that the latest rise was "necessary", but added caution was needed in future so as not to slow UK growth too much.

"The MPC (Monetary Policy Committee) has to be firm. But it is important not to overreact to transitory developments," the British Chambers of Commerce (BCC) said.

Inflation targeted

It added that the nine-member committee should take a wait-and-see approach on inflation, as the Bank itself expects the rate of price growth to slow later this year.

Big cuts in gas and electricity prices are now coming through and we can be confident that CPI inflation will fall back towards the 2% target
Peter Spencer, Ernst & Young ITEM Club

The Bank of England is due to release its quarterly inflation report next week.

"There is a danger that concern over recent events would generate pressures on the MPC to go over the top and would result in damaging monetary overkill," the BCC added.

"UK disposable incomes are being squeezed, spending is set to decelerate and growth will inevitably slow."

Manufacturing group the EEF said that while it accepted rates had to rise, future increases could leave the UK's fragile manufacturing recovery at risk.

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According to figures released just hours before the bank's decision, UK manufacturing output rebounded slightly in March.

However, while the rise will be good news for savers, it could mean higher bills for homeowners, as it will add an extra 16 a month - on average - to a 100,000 mortgage.

Rise 'enough'?

Looking ahead, experts are split on the future course of interest rates.

While some predict rates will rise at least as high as 5.75% in coming months, others believe the latest increase is "enough for now".

"Big cuts in gas and electricity prices are now coming through and we can be confident that CPI inflation will fall back towards the 2% target. That will give the bank some breathing space," said Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club.

However, he warned that future "belt-tightening" from consumers would be needed in order to avoid future rate rises.




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