Bank raises interest rates to 4.75%

The Bank of England today delivered a blow to homeowners as it raised interest rates for the first time in two years in a pre-emptive strike against inflation.

In a precautionary move after inflation went up sharply in June, the Bank's monetary policy committee (MPC) lifted borrowing costs by a quarter of a percentage point to 4.75%.

"With inflation likely to remain above the target for some while, the committee judged that an increase of 0.25 percentage points ... was necessary to bring CPI [consumer price index] inflation back to the target in the medium term" an MPC statement said.

Before the committee's move, many analysts had predicted it would be a close call amidst conflicting economic data.

The MPC's task was not made easier by today's mixed bag of data.

According to a Chartered Institute of Purchasing and Supply/RBS survey, services - the dominant sector in the UK economy - grew less than expected in July and at the weakest pace in four months.

Analysts thought - mistakenly, as it turned out - that the evidence of softer services expansion last month and more moderate increases in prices charged would have bolstered the case for unchanged interest rates.

Howard Archer, of the consultancy Global Insight, said he now expected the Bank to keep rates at their current level for some time.

"We expect growth to be generally softer over the coming months compared to the second quarter and the labour market to slacken further, therebyhelping underlying inflationary pressures to remain largely contained," he said.

"As a result, we expect the Bank of England to now return to the sidelines for another extended period."

Elsewhere, Halifax - Britain's largest mortgage lender - said house prices had risen 0.2% in July after two consecutive months of decline.

It raised its forecast for house price inflation in 2006 to 5% from 3%, but detected signs that upward trends in prices and activity levels were easing.

At last month's MPC meeting, all seven members voted to hold rates and minutes showed them to be in no hurry to raise borrowing costs.

Since then, however, it has emerged that the annual inflation rate unexpectedly rose to 2.5% in June - well above the MPC's 2% target - reflecting the impact of soaring energy costs on petrol prices and utility bills.

Economic growth in the second quarter was also brisk, with preliminary estimates of GDP growth up by 0.8%, above the long-run trend and following upward revisions to past years.

Today's rise could mean trouble for households at a time when debt has reached record levels, with Britain's big banks this week reporting a large increase in bad debts.

Barclays today said the amount of money set aside to cover bad loans had surged to more than £1bn over the first half of the year - an increase of 50% - with Barclaycard customers struggling to repay their mounting credit card bills.

The Centre for Economics and Business Research had earlier urged the Bank to be careful about lifting interest rates given this background.

"With debt levels so high, if rising UK interest rates were to hit housing values and the worth of shareholdings and pension fund plans, then the gearing [level of debt] on household balance sheets would rise to levels not seen for more than a decade," it said in a statement.