Interest rates rise by 0.25%

The Bank of England has raised interest rates by 0.25% to 5.5%, it announced today.

It comes two months after an identical rise, which was also intended to quell growing inflationary pressures.

Nationwide, Britain's biggest building society, held back from instantly raising its mortgage rates. Britain's biggest lender Halifax said it was also reviewing its rates.

The move came as a bitter blow to industry and unions which had been urging the Bank's Monetary Policy Committee to leave base rates on hold in order to help manufacturers still struggling due to the high value of the pound.

They argued that with headline inflation at a 36-year low and the underlying rate still well below the government's 2.5% target, there was no need for the MPC to act this month.

However with average pay running above the level the Bank regards as being consistent with the inflation target, the housing market continuing to boom and signs of overheating in the service sector, most City analysts had expected that rates would go up. In his Mais lecture address last month, chancellor Gordon Brown gave his blessing to the MPC to raise rates again. Business leaders reacted uneasily to the decision to lift rates, describing the move as "understandable" but calling for no more rises this year.

Kate Barker, chief economic adviser at the Confederation of British Industry, said: "A rise in interest rates is never welcome to business, but the CBI accepts there are currently some indications of future inflation pressure, especially if higher house prices feed through into consumer demand. However we believe these inflation pressures remain limited. Many sectors of the economy, especially but not exclusively firms facing foreign competition, are seeing continued downward price pressure."

She added: "While there may have been a case for two pre-emptive quarter-point interest rate rises made this autumn, we believe that interest rates can now safely be left on hold into 2000."

Dr Ian Peters, deputy director general of the British Chambers of Commerce, said: "The Bank's decision is understandable given the warning signs on inflation, but business will be disappointed. Our main concern is the impact that this rise will have on exporters struggling with an already over-valued pound. Continued interest rate rises hold the danger of doing untold damage to the international competitiveness of manufacturers. The chancellor must identify other weapons to combat inflation."

Unions criticised the rise which they warned will put thousands of jobs in manufacturing at risk.

TUC general secretary John Monks said: "This is an unnecessary rise which will keep the pound at an uncompetitive level. Britain is not on the verge of an inflationary boom. We need a period of interest rate stability to give manufacturing a chance to recover."

Sir Ken Jackson, general secretary of the Amalgamated Engineering and Electrical Union said: "The rise will choke confidence, stunt growth and cost manufacturing jobs. Manufacturing is slowly recovering, but this will put that on hold."