Onwards and upwards

The Bank of England's decision to raise interest rates by 0.25% to 4.5%, as the first tentative signs of a manufacturing recovery emerge, is not the most obvious way to strengthen our eroded industrial base. Although the output of manufacturers rose 0.9% in April, it fell by 0.1% during the most recent quarter. But saving industry is not the object of the exercise. The bank fears that the annual inflation rate - currently only 1.2% - will exceed the statutory target of 2% in two years' time if it doesn't apply the brake on cost pressures now. It is the second successive 0.25% rise and the fourth in eight months.

The increasing frequency of rate rises may soon start to curb the credit binge that has sent consumer debt soaring to £1 trillion for the first time. But most of this consists of mortgage debt secured against houses that are still rising in value by over 20% a year. In these circumstances the prospect of a 0.25% rise in interest rates seems like a pin prick. The government's reliance on monetary policy to steer the economy looks increasingly inadequate to control the three key sectors that require different policies. Manufacturing needs lower interest rates to boost competitiveness, while services require higher rates to prevent overheating. Housing needs quite different treatment, because the penal level of interest rates needed to prick the housing bubble would probably trigger a recession in the rest of the economy.

But something must be done in the interests of fairness as well as efficiency. Anyone with a house worth £150,000 house a year ago will have benefited from a £30,000 tax-free capital gain - much more than the average salary, especially after tax. Someone who could not afford to buy a year ago will now have to pay that much more. This is the big economic divide in Britain: between those with homes and those without.The boom is not sustainable, but it won't be speedily cured by small increases in interest rates. If it continues much longer the government is going to have to think of other ways to deal with it. Building a lot more houses would be a start.