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MPC VOTES FOR 0.25% RISE IN BANK BASE RATE

The Bank of England&#39s Monetary Policy Committee today voted to raise interest rates by 0.25%.

The MPC&#39s decision to raise the base rate to 3.75% is the first increase since February 2000, and was broadly expected by analysts as the inevitable reaction to continued growth in household debt.

Lenders say the move marks an important turning point for the UK economy after nearly four years of falling base rates. The low interest rate environment has fuelled the housing market and consumer borrowing to record levels and many predicted MPC intervention to “end the party before it gets out of hand”.

George Johns, economist for The Woolwich, says: “Over recent years, consumer expenditure has acted as a useful prop for the UK economy at a time when many other countries have suffered during the global downturn.

“However, against a backdrop of an improving international and domestic economic environment, today&#39s decision will rightly put the onus onto other areas of the economy to drive economic growth going forward in the absence of a rampant consumer sector.

City analysts have predicted that the base rate will rise to 5.25% by the end of 2004, though mortgage industry experts say this figure could be an exaggeration.

Charcol&#39s Ray Boulger says: “The manufacturing economy is still weak and sterling is strong. The challenge is to slow the growth in borrowing without undermining the economy.

“While we continue to believe that house price inflation will slow, a quarter point rise is likely to have little or no material effect on the state of the housing market, so fundamentally nothing has changed. Despite today&#39s quarter point rise to 3.75%, interest rates are still at a near 50-year low and it is important that homeowners and borrowers keep today&#39s rate rise in context and don&#39t panic.”

With poor performance continuing in the Eurozone and the US Federal Reserve expected to maintain low rates for some time to come, he adds that interest rates in other major economies can&#39t be ignored predicting the Bank will not stray far from the US or Europe.

Oposition parties say the rate rise will cost those with an average outstanding mortgage over £150 extra a year.

Malcolm Bruce MP, Liberal Democrat shadow DTI secretary, says: “Although a rise has been widely anticipated, this will still send a frisson of concern among credit companies, retailers and the wider business community.”

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