Bank of England hikes rates

Manufacturing industry and mortgage holders greeted the Bank of England's decision to raise interest rates with criticism today.

The Bank's nine-member monetary policy committee (MPC) voted to increase the official cost of borrowing by a quarter point - from 5.75% to 6% - taking it to its highest level for 13 months.

The decision, intended to keep prices in check and prevent inflation rising again, was widely expected in the City. If, as expected, mortgage lenders raise their rates in line with the increase, the cost of a ?60,000 mortgage will rise by about ?9 a month.

Although underlying inflation, at 2.2%, is still comfortably below the government's 2.5% target, the MPC fears that strong consumer demand, rising pay and the booming housing market could cause prices to increase.

However, manufacturing unions warned that the rise could lead to a further strengthening of the pound, adding to the difficulties faced by exporters.

The general secretary of the Amalgamated Engineering and Electrical Union, Sir Ken Jackson, said the rate rise would "choke" exports in the Midlands and the north. "House prices in the south are driving up interest rates," he added, "but each rise hits exporters throughout the regions."

Shadow chancellor Michael Portillo said: "As Gordon Brown has been so quick to take credit for previous rate reductions, it will be interesting to see whether he is quick to take responsibility for today's interest rate rise.

"Presumably he will, since only last week he publicly instructed the bank to raise rates. It is tough for manufacturers to take this rate rise because they have already been hit by billions of pounds of extra stealth taxes and regulations under Labour."

TUC general secretary John Monks said the rise was "disappointing", adding: "As the MPC has been under pressure to raise rates more steeply, industry and the regions will be grateful that they have chosen the less painful option. Industry needs a period of interest rate stability to ensure a balanced economic recovery."

The Confederation of British Industry (CBI) said it believed the rise was unnecessary, as previous rate increases had been enough to keep the lid on inflation. "This is more bad news for manufacturers," said the CBI's chief economic adviser Kate Barker.

"Companies are working hard to cope with the exchange rate, but this rise in interest rates will be an additional handicap. It will be a setback to fragile confidence as firms try to take advantage of growth in global markets.

"Many companies will find the rise hard to understand when inflationary pressure remains so low in most sectors."

However, the Institute of Directors (IoD) gave a sympathetic response to the MPC decision, saying it "understood" the reasons for the rise.

Ruth Lea, head of the IoD's policy unit, commented: "While we recognise the real burdens placed on business by higher interest rates, we accept they need to rise to in order to maintain the low inflation stability which is essential for business to thrive. The alternative, tighter fiscal policy, has clearly been ruled out by the government."

The MPC will make its detailed report on the outlook for inflation on February 17, while minutes for this week's meeting will be published on February 23, giving a full insight into the committee's thinking.