Jobs fear as Bank increases loan rate

The Bank of England raised interest rates yesterday for the second time in three months in a move expected to mean more expensive home and business loans.

The increase to 5.5% from 5.25% came against a backdrop of accelerating economic growth, rising wage pressure and a booming housing market - all of which traditionally lead to inflation.

Concern that the improving global economic outlook may stoke inflationary pressures also prompted the European Central Bank to increase its key lending rate to 3% from 2.5%, the first time borrowing costs in the so-called eurozone have risen since the currency was born in January.

When the Bank of England's monetary policy committee (MPC), comprising five bank staff and four independent economists, raised interest rates in September, it issued a statement justifying the increase.

But yesterday the MPC remained silent about its decision. This roused suspicion in the City that the committee was unable to unite behind a common position.

With the four outsiders complaining about a lack of access to research facilities at the bank, Roger Bootle, economic adviser to accountants Deloitte Touche, said there could have been a "blazing row".

"Two of the outside members, DeAnne Julius and Sushil Wadhwani, are well known doves and will almost certainly have voted against," he said.

However, the absence of a statement may merely mean that the MPC is waiting until publication of its quarterly inflation report next week before explaining its decision.

Banks and building societies refrained from raising mortgage rates immediately, with the big lenders saying they were under review, although industry observers say it is only a matter of time before repayment costs rise.

Business leaders grudgingly accepted the increase, saying they were prepared to give the MPC the benefit of the doubt. But the rise was condemned by unions who fear further job losses in manufacturing, where exporters are still struggling with the strong pound.

Kate Barker, the chief economic adviser at the Confederation of British Industry (CBI), 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."

John Monks, the general secretary of the TUC, 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."

Some economists believe the MPC is in the process of correcting the mistake of cutting rates too vigorously in response to last year's global financial crisis.

Having increased them five times in the wake of Labour's election victory to a peak of 7.5%, the MPC reduced rates seven times between October last year and June to 5%, evidence of a highly active approach to monetary policy.

A recent study by the National Institute of Economic and Social Research showed that inflation would have been just as well behaved if the cost of borrowing had been left on hold at around 6%.

The study noted that other central banks had achieved similar success at fighting inflation without changing interest rates so frequently.

Noting that the latest rise was the 15th change in interest rates since Labour came to power - the chancellor, Gordon Brown, increased them once before handing control of monetary policy to the MPC - the shadow chancellor, Francis Maude, said: "Gordon Brown's monetary arrangements were supposed to deliver interest rate stability. Instead, business today faces greater instability."