UK interest rates rise to 4.5%

Interest rates have been increased by a quarter percent to 4.5%, the Bank of England has announced today.

The bank's Monetary Policy Committee (MPC) said today that while inflation is below the 2% target, "cost pressures are rising".

Greater household spending, public consumption and investment, and a buoyant housing market all contributed to the MPC's decision.

"Against that background, the Committee judged that a further increase of 0.25 percentage points in the repo rate to 4.50% was necessary to keep CPI inflation on track to meet the target in the medium term," the committee said.

As indicated in the May Inflation Report, a small and diminishing margin of spare capacity means that inflationary pressures are likely to continue building, it added.

Reacting to the decision the CBI Director-General, Digby Jones, said that increase would have little effect on the housing market.

"Business accepts this latest rise as long as the motive is to ensure that interest rates peak at the lowest possible level," he said.

"But, consecutive rises do mark a shift from the gradualist, well signalled MPC policy of the past and will do little to control house prices, rising due mainly to lack of supply in the housing market, or the inflationary effect of wage increases evident in the public sector."

Lib Dem Shadow Chancellor, Vince Cable, claimed that today’s interest rate rise would cost an average first-time buyer £250 extra a year on their mortgage. If interest rates continue to rise, or house prices start to fall, many could find themselves in difficulty, he added.

"The Bank is caught between dealing with the weaknesses in the economy and curbing the house price boom," the Lib Dem frontbencher said.

"Gordon Brown must urgently address the failures that have allowed banks to lend irresponsibly and fuel unsustainable levels of debt."

The Tories said Gordon Brown's "spending spree" had forced the MPC to raise rates.

Shadow Chancellor Oliver Letwin said: "We are now approaching levels of interest which may prove uncomfortable to many people who have large mortgages or other borrowings.

"Given that household debt is on the verge of breaching the £1 trillion barrier, the combination of higher interest rates and high levels of debt is becoming a serious issue."

The previous change in interest rates was an increase of 0.25 percentage points to 4.25% on last month.

(gmcg)