Bank raises interest rates again to 4.5%

Firms and homeowners feel the pain as quarter-point hike heralds first back-to-back rise in four years

Businesses and homeowners were hit by the first back-to-back rise in interest rates for more than four years yesterday, as the Bank of England stepped up its efforts to quell inflationary pressure from booming house prices.

Businesses and homeowners were hit by the first back-to-back rise in interest rates for more than four years yesterday, as the Bank of England stepped up its efforts to quell inflationary pressure from booming house prices.

The Bank raised rates by a quarter point to 4.5 per cent, their highest level since October 2001 and the first successive monthly rise since February 2000. The decision means the Bank has abandoned its policy of "gradual" rate rises and experts said households should be braced for further hikes - with one warning rates could hit 6 per cent.

"Inflationary pressures are likely to continue building," the monetary policy committee said in a statement. It said household and government spending had grown strongly, the housing market was buoyant [and] the labour market had tightened.

"Against that background, the MPC judged a further increase was necessary to keep inflation on track to meet the target in the medium term," the statement said.

The decision will add £15 to the monthly mortgage bill for a typical borrower with a £100,000 mortgage. Since last November, their payments have risen by £60 - equivalent to £720 a year. If rates hit 6 per cent, a typical borrower will pay £1,750 a year more than they were when rates troughed at 3.5 per cent last summer, according to Clear Cut Mortgages.

"Today's rate rise is likely to hurt," said Ben Thompson, a director at the mortgage adviser. "The question for the Bank will be one of whether they have got the balance right. One step too far at this stage will hurt a lot of homeowners."

The Bank has grappled with how far it can raise rates to slow a booming domestic economy without delivering a fatal shock to households that are carrying a record £1 trillion (£1,000bn) of debt. Since November the MPC has taken a "gradual" approach - raising rates every three months to coincide with the publication of its updated inflation forecasts.

Yesterday's move broke that pattern and raised speculation the Bank might start raising rates more often. John Butler, a UK economist at HSBC, said: "It marks the official death of the gradual approach and now they are stepping up the pace. I think it means more frequent, more aggressive rate moves from now on."

This week, Halifax bank said house prices rose 2.2 per cent in May, taking the annual inflation rate back over 20 per cent for the first time in a year. It was the latest price report to show four rate rises since November, when house price inflation was running at 14 per cent, have done little to slow the consumer.

Nick Stamenkovic, at RIA bond brokers, said: "The consumer has not responded to recent rate rises and this decision shows the Bank will do whatever necessary to slow the consumer and take some steam out of the housing market."

Abbey became the first major lender to respond yesterday, increasing its standard variable rate by 0.25 per cent to 6.5 per cent.

Several analysts pointed out the UK had embarked on a path taken by the Reserve Bank of Australia (RBA), which raised rates twice last winter in the midst of a housing boom. Since then housing prices and economic growth have cooled markedly.

"The RBA appears to have pulled off a significant coup," said Stephen Lewis, chief economist at Monument Securities. The Bank, which has now raised rates four times and by more than the RBA, is hard pressed to discern any effect from its action.

"MPC members stand open-mouthed as retail sales scarcely miss a beat and house prices rise as rapidly as ever."