Bank raises interest rates by quarter per cent

The Bank of England monetary policy committee today took a pre-emptive strike against an overheating economy by unexpectedly raising interest rates 25 basis points to 5.25%

The move comes against a backdrop of rocketing housing prices reminiscent of the property boom in the 1980s. Most analysts had expected the Bank to leave rates unchanged despite strong expansion in retail sales and a recovery in factory output in July, which strengthened the hand of "hawks" pressing for a boost in rates.

The Bank cited world demand, strong consumption and the housing market and continuing tightness in the labour market as the context for its decision.

Recent figures published by the office for national statistics for July revealed a 0.3% monthly increase in industrial output, with manufacturing alone expanding by 0.3 % during the month. July's increased output arrested the year-on-year decline in manufacturing from 1.6% in June to 1.4% in July.

"Although inflation is expected to remain below the target of 2.5 percent in the short term," the Bank said, "the committee concluded that a rise in interest rates was necessary to keep inflation on track further ahead, and that an early move could lower the level at which interest rates might otherwise need to be set"

The pound posted its biggest gain in a week against the dollar after the unexpected rise in its benchmark interest rate.

``No one was expecting them to hike rates this early and the sterling market's been taken by surprise,'' said Cameron Crise, a currency strategist at Warburg Dillon Read.

The pound surged to $1.6157 from $1.6077 before the rate announcement and $1.6061 late yesterday. It also climbed against the euro, pushing the single currency down to 0.6558 pound from 0.6587 pound.

The Bank of England increased its benchmark repurchase rate by 25 basis points to 5.25 percent. It is now at the same level as the U.S. benchmark overnight lending rate. All 15 economists polled by Bloomberg News expected the central bank to leave rates unchanged at a 22-year low of 5.0 percent for a third consecutive month.

Halifax , Britain's largest building society, said that it would lift its key variable mortgage rate by 14 basis points to 6.99 percent. House prices have jumped about 10% percent this year, as buyers took full advantage of some of the lowest mortgage rates in a decade.

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