Bank speeds up rate rises in bid to slow down house price boom

The Bank of England raised interest rates for the second month running yesterday as it continued its attempts to take the steam out of consumer borrowing and house prices. The Bank also hinted that there could be further rises.

The quarter-point rise to 4.5% - the first time in four-and-a-half years that rates have gone up two months in a row - had been expected by City pundits and takes borrowing costs to a level last seen in the autumn of 2001.

The Bank's monetary policy committee (MPC), which had been content with raising rates every three months, explained its change of pace by saying it was worried that household spending, house prices and industry's costs were rising too fast. The increase is the fourth since last November and takes rates a full percentage point above last year's 48-year low of 3.5%.

Lenders such as Abbey National and First Direct quickly said they were raising their rates by the full quarter-point. Others, including the Halifax and Nationwide, are expected to follow suit. That will mean an additional £15 a month on a £100,000 repayment mortgage and means borrowers will now be paying £60 a month more than they were when the Bank started raising rates last autumn. Savers will benefit from the rise, however.

The MPC had hinted last month that it was inclined to speed up the pace of interest rates rises, revealing it had considered a half-point rise at its May 5-6 meeting. It has never raised rates by more than a quarter point in its seven-year history.

Economic data since the MPC's last meeting have been universally strong, with house price inflation topping 20%, according to the Halifax, consumer borrowing surging at a record pace and set to top the £1 trillion level this week and manufacturing output finally recovering. Unemployment has set fresh, record lows, potentially putting upward pressure on wages.

The only thing that might have prevented a rise was soaring world oil prices. But, having set a record high above $42 a barrel last week, prices have since fallen sharply.

"In raising interest rates for the second month in a row the MPC has sent its strongest signal yet that it wants to bring an end to the consumer and housing market booms," said Roger Bootle, head of consultancy Capital Economics.

"It has realised that it needs to modify the 'boring monetary policy' if it is to have a significant effect. To be effective, policy has to affect popular psychology," he added, referring to Bank governor Mervyn King's professed aim to make monetary policy dull.

The head of the Confederation of British Industry, Digby Jones, said business accepted the rise as long as the motive was to ensure that interest rates peak at the lowest possible level.

"But, consecutive rises ... will do little to control house prices, [which are] rising mainly due to lack of supply in the housing market, or the inflationary effect of wage increases evident in the public sector," he said.

The Council of Mortgage Lenders warned homeowners to brace themselves for more rate rises. City economists see rates going up to over 5% by the end of the year and above 5.5% by the middle of next year.