Interest rates rise to 4.25%

The Bank of England raised interest rates today for the third time since November in an effort to take some wind out of a strengthening economy.

As widely expected and in keeping with its "gradualist" approach on interest rates, the Bank's monetary policy committee (MPC) pushed up the cost of borrowing by a quarter-point to 4.25%.

"The global economic upswing has been maintained. In the UK, output growth has been at or above trend and business surveys are consistent with further strengthening. Retail spending continues to be robust, underpinned by income growth and unexpectedly strong house price inflation. Investment prospects have improved," the Bank said in a statement.

In a week that saw plenty of evidence of a buoyant economy - rising house prices, soaring debt and a recovering manufacturing sector - the MPC decision was all but a foregone conclusion as far as analysts were concerned.

Hours ahead of the Bank's move, a survey also showed a pick-up in activity in Britain's dominant service sector in March. According to the Chartered Institute of Purchasing and Supply (CIPS) and Reuters, the activity index for UK services rose to 59 from 58.7.

The reading reversed a slippage in the previous two months and stayed well above the 50 mark dividing growth from contraction. A component index for prices charged by services firms rose to 53.5 from 53, its highest level since December 2000.

Meanwhile, house prices and consumer borrowing have shown little sign of cooling despite two interest rate rises. The Halifax bank said yesterday that house prices had risen by 1.8% in April, up 19.1% on a year earlier and the fastest rate of growth since last August.

Earlier in the week, the Bank of England released figures showing a ?9.3bn jump in mortgage lending in March, a record 15.2% surge on a year earlier.

Even the battered manufacturing sector had some positive news this week. The purchasing managers' survey, conducted by CIPS and Reuters showed that the overall activity index for the sector rose to 55.1 last month, the best since January.

The Bank tightened monetary policy even though inflation is running at just 1.1%, well below the government's target of 2%. That is just two tenths of a point from the level at which Mervyn King, the Bank's governor, would have to write a letter to the chancellor, Gordon Brown, to explain why inflation is so far below target. However, the Bank can argue that it has to take a pro-active approach as it is targeting inflation two years out.

An upward move on base rates will cost homeowners with an average ?65,000 mortgage just under ?10 month. Monthly repayments on a ?65,000 loan will increase to ?428.78 from ?418.79, based on a new mortgage rate of 6.25%. First-time buyers, who are more likely to have a loan of around ?100,000, will see their repayments rise by ?15 a month to ?659.66.