Halifax and Nationwide first to raise cost of home loans

Britain's biggest mortgage lenders yesterday reacted swiftly to Thursday's surprise Bank of England base rate rise. Both Halifax Bank and Nationwide Building Society said they would pass on the 0.25 percentage point increase to customers in full.

Halifax is to raise its standard variable lending rate to 7.25 per cent with effect from 1 February, while Nationwide's equivalent rate will rise to 6.74 per cent on the same date. Both lenders said the rises would apply to all their variable-rate mortgages and both promised to raise the interest rates paid on their variable-rate savings accounts by the same amount.

The higher mortgage rate will add £23 a month to the repayments on the average £110,000 25-year repayment mortgage. All of Nationwide and Halifax's leading rivals in the home loan market are expected to follow suit before the end of this month.

Meanwhile, economists are anxiously awaiting the publication, in two weeks' time, of the minutes of the meetings of the Bank of England's Monetary Policy Committee this week, which will explain why the MPC decided on an early base rate rise.

Some analysts believe the MPC may have raised rates to head off inflationary threats in the months ahead, including strong house price growth and a generous round of annual pay settlements.

However, City analysts warned that the timing of the increase, a month earlier than expected, may also reflect the Bank's mounting concern about existing inflation - in particular that December's inflation figures, due to be published on Tuesday, will be worse than expected.

If the headline rate of inflation is now above 3 per cent, the Bank has a statutory duty to write to the Chancellor to explain why it has allowed the Consumer Price Index to move more than 1 percentage point away from its 2 per cent target. One economist said: "It would help the Bank, if it had to admit to having lost control of inflation, if it could point to action already taken to remedy the problem."

Dominic White, an analyst at ABN Amro, added: "For some time we have believed the risks to UK interest rates were being underestimated ... consumers seem to have defied the MPC's expectation of a moderation in spending."

But Stephen Lewis, an economist at the private bank Insinger, argued: "Paul Tucker, an MPC member indicated last month that he has supported November's rate hike as a warning against excessive pay deals and it seems likely that a similar motivation was behind [this week's] vote on the MPC."