Bank's surprise base rate rise angers industrialists

The Bank of England surprised the City and outraged industry yesterday when it launched a pre-emptive strike against inflation by pushing up the cost of borrowing for the first time in 15 months.

After cutting rates only three months ago, the Bank blamed falling unemployment, strong high street spending, rising house prices and the pick-up in the world economy for the decision to raise base rates by a quarter-point to 5.25%.

Britain's biggest mortgage lender, the Halifax, responded swiftly to the news, increasing the cost of its home loans by 0.14 percentage points to 6.99% - adding £5 a month to a £60,000 mortgage and just over £8.60 a month to a £100,000 loan. Most other lenders put their rate decisions on hold, although the Nationwide said it would not be imposing an increase.

The Bank said there was no short-term threat to the government's 2.5% inflation target, but that it took yesterday's step to avoid repeating the mistakes of the late 1980s, when a period of rapid economic growth was followed by a deep recession. It said its nine-strong monetary policy committee had concluded "an early move could lower the level at which interest rates might otherwise need to be set".

The committee is believed to have been split, with some members believing low inflation will persist. City dealers, who were taken unawares, believe there are more increases to come and expect rates to rise to 6.25% in the next year. Sterling rose by two cents against the dollar after yesterday's announcement and shares fell.

Kate Barker, the Confederation of British Industry's chief economic adviser, said the rise could set back recovery, following the steady cuts in base rates from 7.5% last autumn to a 30-year low in June.

"We believe it was unnecessary, and that it risks damaging steady growth in the economy and a better balance between the domestic economy and firms exposed to competition from abroad," she said.

John Monks, the TUC general secretary, called the rise "disappointing, premature and unnecessary".

Although the Treasury is relaxed about the move - believing the risks of a premature rate increase are lower than the risks of inaction - the announcement was seized upon by opposition parties.

Francis Maude, the shadow chancellor, said: "This is a sobering warning from the Bank of England that all is not well with Labour's handling of the economy. The rise will come as a bitter blow to hard-pressed manufacturers."

Malcolm Bruce, Liberal Democrat Treasury spokesman, said: "This widens the gap between the UK and continental economies [and] damages manufacturers, exporters and farmers."