Bank of England raises interest rate to 4.75%

Millions of households in Britain were facing more costly mortgage, overdraft and credit card debt last night after the Bank of England surprised the City with its first rise in interest rates in two years.

In a move condemned as premature by industry and unions, the Bank announced a pre-emptive strike against rising inflationary pressures by pushing up its repo rate - the basis for all other borrowing costs - from 4.5% to 4.75%.

The move will mean higher monthly bills for homeowners with variable rate and "base-rate tracker" mortgages. If the rise is passed on in full, it will add about £15 to the monthly mortgage payments of a borrower with a £100,000 repayment mortgage - or £20 in the case of someone with a £100,000 interest-only home loan. Those with a £200,000 mortgage will need to find an extra £31 or £41 respectively.

A statement from the Bank's monetary policy committee, which is currently lacking two of its nine members, said stronger growth, a recovery in consumer spending from a post-Christmas lull, signs of an investment pick-up and the buoyant state of Britain's main export markets meant action was required to meet Gordon Brown's 2% inflation target.

It said: "Against the background of firm growth, limited spare capacity, rapid growth of broad money and credit, and with inflation likely to remain above the target for some while, the committee judged that an increase was necessary to bring consumer prices inflation back to the target in the medium term."

In a poll conducted ahead of the two-day MPC meeting, only eight of 46 City analysts questioned had predicted an increase in rates - the first move of any kind by the Bank since it cut rates by a quarter-point exactly a year ago.

Even those who expected the Bank to move yesterday said they saw the decision as a pre-emptive strike, with a small increase in borrowing costs now designed to avoid the need for a bigger rise in rates later. "We see this as a stitch-in-time policy and it should prevent interest rates from having to go up again," said Philip Shaw, the chief economist at Investec, who correctly predicted the MPC's move.

The City's money markets, however, were pointing to a further tightening of policy by the Bank before Christmas, and the fear that 5% interest rates by the end of the year would affect the spending of Britain's millions of heavily indebted consumers wiped £24bn off the value of the London stock market.

Banks and building societies were keeping their mortgage customers on tenterhooks yesterday, with none of the major players announcing changes to their standard variable rates. The Halifax, Britain's biggest lender, spoke for most when it said it was "reviewing the situation".

But those people with fixed-rate home loans will be protected from any rate rise. Fixed-rate deals are thought to account for about half of all mortgages. However, nowadays only a minority of borrowers pay their lender's standard rate - it is thought that in the case of the Halifax, the proportion is less than 10% of its 2 million-plus home loan customers. Those with loans that track the Bank of England base rate will automatically feel the full impact of the change.

The TUC assistant general secretary, Kay Carberry, said: "This is a double blow for working people with mortgages to pay. With manufacturing still struggling and unemployment creeping up the country needs interest rates to stay low."

The EEF director general, Martin Temple, said: "The Bank has jumped the gun with today's decision. 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. Business will not look kindly if this rise has to be quickly reversed later in the year."