Interest rates go up again

Soaring house prices and tumbling unemployment triggered the third increase in interest rates in five months yesterday as the Bank of England moved to prevent inflation rising above the government's 2.5% target.

Amid fears of a return to the boom conditions of the late 80s in London and the south-east, the Bank's monetary policy committee prompted anger among industrialists and trade unionists by pushing up base rates from 5.5% to 5.75%.

Britain's big mortgage lenders said they would review home-loan rates over the next few days, but are expected to pass on the quarter-point increase to their borrowers. Analysts believe the Bank will increase rates again next month when it has more information about the strength of the economy over the Christmas and New Year period.

In a statement explaining the decision, the Bank said: "Prospective growth in domestic demand remains strong: increases in wealth, labour income and household borrowing all suggest that consumer spending will continue to grow strongly."

Inflation excluding mortgage interest payments is currently 2.2%, but the Bank said labour shortages and supply bottlenecks would put the government's target in jeopardy unless rates were increased immediately.

The announcement coincided with fresh evidence of Britain's two-tier economy, with the Halifax revealing that house prices in Greater London had gone up by almost a third in 1999 - a faster rate of increase than in the 80s Lawson boom - while the clothing firm Dewhirst blamed a squeeze on profits for the loss of 1,000 jobs at its factories in Winsford, Cheshire and Peterlee, County Durham.

The Council of Mortgage Lenders said the Bank's move would help ensure that the "hotspots" in the housing market were kept in check and did not lead to widespread overheating. "Although rising interest rates will never be welcome to homebuyers, they are a price worth paying for low inflation, not only in the wider economy but in the housing market", said Michael Coogan, the CML's director general.

City dealers had anticipated the Bank's decision, and share prices and the pound were unaffected. However, industry said the move would inflict further damage on manufacturers and exporters struggling with the impact of the high pound. Digby Jones, the newly appointed director-general of the CBI, said the decision was "unsurprising but still disappointing". Roger Lyons, general secretary of the MSF union, said: "This is a disaster for manufacturing, particularly for jobs in the north."