MILLIONS of homeowners and businesses were hit by a surprise interest rate rise yesterday marking the first increase in borrowing costs for two years.

The unexpected quarter-point rise in base rates, to 4.75 per cent, reversed a cut a year ago and badly wrong-footed most of the City. It sparked immediate warnings that the Bank of England could now spring another shock increase before the end of the year.

The quarter-point rate rise is likely to cost homeowners with an average £80,000 mortgage just over £12 a month.

There were also warnings that the rise could tip thousands of vulnerable households into bankruptcy. Insolvency figures today are expected to show a further jump in individual and business bankruptcies, while there are fears of a further leap in home repossessions.

Business leaders rounded on the Bank’s rate-setting Monetary Policy Committee (MPC), accusing it of “jumping the gun”, and jeopardising the economy’s recovery.

But the Bank coupled its action with an aggressively-worded verdict on the state of the economy. Some economists suggested this left a further rate rise before Christmas a real risk. However, many experts predict that yesterday’s move will most likely prove the last until at least 2007.

Stock market investors were caught off-guard by the Bank. Shares were sent tumbling, while the pound leapt a cent against the dollar.

The FTSE 100 index slumped by as much as 2 per cent, wiping £24 billion off the value of Britain’s bluechip companies at one point. It later clawed back ground to close down 93.7 points, or 1.6 per cent, at 5,838.4.

With millions of Britons struggling under the weight of the nation’s £1 trillion-plus in household debts, as well as the impact of soaring fuel and utility bills, business groups claimed that the Bank risked undercutting a still-fragile revival in consumer spending.

“The MPC has done nothing to support the UK’s economic recovery by increasing rates,” the British Chambers of Commerce, said.

Kevin Hawkins, of the British Retail Consortium, said that the Bank had acted prematurely and would damage business and consumer confidence.

“Consumer confidence is negative, consumer borrowing at the lowest level for 12 years . . . Higher rates will make consumers even more pessimistic,” he said.

Unions, the CBI and the EEF, representing manufacturers, also weighed in to condemn the rate rise.

Overstretched homeowners and first-time buyers will be hardest hit by the rate rise, the mortgage lending industry predicted. Homebuyers who have tried to limit mortgage bills with an interest-only loan would also suffer as their repayments rise more sharply. There is growing concern that some borrowers lulled into a false sense of security by eleven months of stable rates could be tipped over the edge by the quarter point rise.

But leading lenders were last night keeping borrowers in suspense, refusing to say when they might raise rates.

A typical borrower with a £200,000 interest-only tracker-rate mortgage faces paying an extra cost of £500 a year. “The rise is not an earth-shattering amount, but it is significant for those borrowers already over-extended,” Jonathan Cornell, of Hamptons International Mortgages, said.

Others sounded warnings that many over-extended homebuyers might lose their homes. “Repossessions have been soaring during a period of flat interest rates, so yesterday’s rise might prove to be the straw that breaks the camel’s back,” said Peter O’Donovan, of Bestinvest, an independent financial adviser.

In its statement announcing the rate rise, the Bank said it needed to act to ensure that inflation, now running at 2.5 per cent, fell back to its 2 per cent target “in the medium term”.

For now, inflation was likely to stay stuck above the target “for some time”. This was down to a quickening in economic growth to above the long-term pace, fuelled by the consumer spending resurgence, and a pick-up in business investment and exports.

While the Bank said the inflationary impact of record oil prices was set to fade, price pressures would be sustained by “some recovery” in company profits and pay growth.

With the hawkish tone of the Bank’s statement giving few clues to when any further rate rise might come, attention will focus on its assessment in next week’s quarterly Inflation Report.

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