Bank raises interest rates to 4%

MILLIONS of homebuyers face higher mortgage bills after the Bank of England raised interest rates for the second time in four months.

The widely-expected move by the Bank's monetary policy committee, which will mean dearer loans for variable rate borrowers, raised the base rate from 3.75% to 4%.

It follows a similar increase in the cost of borrowing in November, the first for nearly four years and more increases are expected in coming months.

Today's increase follows evidence that the economic recovery is gathering pace. But it also reflects concerns about the long-running housing boom and consumers' reluctance to stop spending and borrowing.

In a statement, the Bank said the world economic recovery had become more broadly based while, at home, output growth in the second half of last year was above trend.

'Household spending and borrowing have been resilient, and the housing market remains strong,' it said. 'Although sterling has appreciated, continued growth above trend means that inflationary pressures are likely to pick up gradually over the next couple of years.'

Abbey National immediately raised its standard variable mortgage rate by a quarter-point to 6%. Barclays and the Woolwich also said they would raise mortgage rates by 0.25%.

Other lenders, including the Halifax, Nationwide, Cheltenham & Gloucester, HSBC and the One account said they were reviewing their rates.

If passed on in full, homebuyers with a £100,000 repayment mortgage will pay approximately £640 a month, £15 more.

Savers are expected to gain because of higher interest payments.

The City took today's rise in its stride as focus shifted to when the Bank of England will deliver its next move. Economists predicted rates would be lifted again in May.

Steve Andrew, at ISIS Asset Management, said: 'The pendulum has swung back to the economy running a bit faster than anticipated.

'The Bank's desire to pursue a gradualist approach suggests it will want to increase rates to coincide with May's quarterly Inflation Report so that it can fully explain its decision.'

George Buckley at Deutsche Bank said: 'If the current momentum in the economy is maintained, inflation will be moving back to target by May.'

According to futures markets, interest rates will end the year at 4.75%.

Today's increase, the second in four months, follows news that economic recovery is gathering pace. It also reflects concern that the housing market boom and record household debt could trigger a consumer crash.

The Bank, led by Governor Mervyn King, said the global economic recovery had become more broadly based while at home, output growth in the second half of last year was above trend and business surveys pointed to a further pick-up in the first quarter.

'Household spending and borrowing have been resilient, and the housing market remains strong,' it said. 'Although sterling has appreciated, continued growth above trend means inflationary pressures are likely to pick up gradually over the next couple of years.'

Market reaction was muted, the FTSE 100 index of leading shares was up 0.8 points at 4399.3. Sterling rose a third of a cent to $1.8375.

Most business groups accepted today's decision. CBI director-general Digby Jones said: 'Rate rises can be tough for companies but business understands that investing in a small early increase might keep inflation in check and protect economic stability.'

However, the British Chambers of Commerce said the rise was premature.

Meanwhile, the latest jobs report from the Recruitment & Employment Confederation showed the tightening labour market is beginning to drive up wages.

The number of people placed in permanent jobs increased for the eighth month in a row in January, and at the fastest pace since May 2000.

As staff availability declined and skill shortages worsened, salaries rose for a sixth consecutive month and at the fastest rate since May 2001.

Shop-price inflation also picked up last month, jumping to 4.24% from 2.97% in December, according to the British Retail Consortium. Food prices rose particularly strongly because of last summer's heatwave.

Across the Channel, the European Central Bank left eurozone rates at 2% following its meeting today.