Bank raises interest rate to 4.5%

THE cost of borrowing rose again today as the Bank of England monetary policy committee nudged up the base rate by a quarter-point to 4.5% - the second such move in as many months.

City economists warned that the Bank may lift interest rates again as soon as August. Today's rise was seen as necessar to cool the housing and borrowing booms.

Philip Shaw at Investec said: 'We suspect today's increase won't be the last, as the economy and housing market have considerable momentum. It's time for the MPC to sit back, and we don't expect rates to move in July. But it's possible they will in August when the Bank prepares its next quarterly Inflation Report.'

George Buckley at Deutsche Bank said: 'The MPC will probably take a breather in July and lift rates again in August, although if the data continue to come in strong there's a risk that we'll get another move next month.'

Today's increase follows those in November, February and May. By breaking the three-month pattern, the Bank has adopted a more aggressive policy approach.

Explaining its move, the MPC said a 'small and diminishing margin of spare capacity means inflationary pressures are likely to continue building'.

The FTSE 100 share index was little moved by the decision, but gilts and short sterling fell sharply. The pound briefly spiked higher before settling back.

Previous increases have failed to slow the rampant housing market or dampen consumers' appetite for credit, and economists were sceptical whether today's move would either.

Adam Law at Barclays Capital said: 'On its own, each individual increase doesn't make much difference. The Bank is on a journey and won't get to its destination of 5% until the end of the year. That's when people will notice.'

CBI director-general Digby Jones said: 'Business accepts this latest rise as long as the motive is to ensure that interest rates peak at the lowest possible level.'

How will it affect your mortgage?

THE rate rise from 4.25% to 4.5% will force up the average monthly mortgage repayment by £15, writes Andrew Oxlade.

A borrower who owes £100,000 on a 25-year repayment home loan at a typical rate of 6% will see their monthly bill increase from £652 to £667 - an extra £187 a year - if their lender passes on the rise in full.

The base rate has risen from a low of 3.5% last November and experts expect the Bank to apply the brakes harder on the UK's runaway property boom by increasing rates further.

If the base rate were to rise a further 150 basis points to 6%, pushing up a typical lender's rate to 7.75%, monthly repayments would rise from £652 to £764 - an extra £1,346 a year.

The pain will be worse for borrowers with interest-only mortgages. The quarter-point rise has put up monthly repayments on a typical 6% mortgage from £500 to £521. A base rate rise to 5.5% would push up the cost by £146 to £646 - an extra £1,500 a year.

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