The Bank of England shocked both homeowners and the City today when it raised the base rate to a five-year high of 5.25 per cent.

The unexpected rate hike means homeowners with a £150,000 variable rate mortgage will see their monthly repayment leap by £31 a month.

Moneyfacts, the financial research group, said that a typical homeowner is now paying £148 a month more on a £150,000 loan compared with July 2003 when the interest rate bottomed out a 3.5 per cent.

The interest rate increase has been prompted by concern that workers’ demand for higher wages is outstripping the rate of inflation, adding to inflationary pressures.

A sharp rise in house prices, which the building society Nationwide states rose by 10.5 per cent over 2006, is also thought to be behind the Bank’s decision.

It is the third rate rise since August last year, and represents a five-year high.
Conversely, the European Central Bank today held interest rates steady at 3.5 per cent, which itself is a five-year high for the Euro zone.

It had been widely expected that there would no change in the rate at today’s meeting of the Bank of England’s Monetary Policy Committee (MPC), ahead of the publication of inflation figures for December due out next month.

Both the MPC and the Government receive inflation data ahead of the market and are believed to have been in possession of the figures since Tuesday this week.

It is the first time since January 2000 that the MPC has pre-empted the February inflation report and raised rates. Typically, increases in employee pay take place between January and April.

The CBI, the employers' body, today called the surprise interest rate hike "disappointing". Ian McCafferty, its chief economic adviser, said: "It is disappointing that, with only tentative indications about the outcome of the wage round, the bank has already decided to increase interest rates.

"If part of the intention was to dampen wage increases, it is doubtful a rate rise will have the desired effect."

He added that if wages failed to increase sharply in the next few months, inflation would fall back to the Bank of England’s medium term target of 2 per cent from November’s 2.7 per cent.
The MPC said: "It is likely that inflation will rise further above the target in the near term, but then fall back as energy and import price inflation abate. Relative to the November inflation report, the risks to inflation now appear more to the upside

"Against that background, the Committee [MPC] judged than an increase in the Bank Rate of 0.25 percentage points to 5.25 percent was necessary to bring CPI inflation back to target in the medium term."