Bank of England raises interest rates to four per cent

The move, which was widely predicted by analysts, follows a succession of encouraging economic figures, with business confidence and recruitment soaring over recent months.

The decision, taken by the Bank’s Monetary Policy Committee (MPC), was also widely expected due to strong high street spending, the recovery of the manufacturing sector and the overheated housing market.

Interest rates are now back at the same level experienced for a year up to January 2003, before the MPC decided to cut rates to stimulate the flagging UK economy.

Business groups have previously urged the Bank to raise rates gradually, to give firms more time to get back on their feet.

However, Digby Jones, head of the Confederation of British Industry, said that firms realise that interest rates need to go up as well as down to maintain the country’s economic stability.

“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.

“Firms will hope this move prevents more aggressive action later and ensures rates peak at their lowest possible level,” he said.

Graeme Leach, chief economist at the Institute of Directors, welcomed the rise, saying that the MPC was attempting to re-balance the UK economy as painlessly as possible.

“The shouts from the Bank of England are getting louder. The Bank wants to change consumer expectations in order to slow household spending, house price growth and debt accumulation.

“If UK consumers listen and respond, interest rates may only need to rise another half point,” he said.

David Bishop, of the Federation of Small Business (FSB), said: “It’s probably a sensible move given the economic data out there, but we would be concerned if this marked the start of repeated rises irrespective of the evidence.”

However, the British Chamber of Commerce was less enthusiastic about the rate rise, with David Frost, director general of the lobby group, saying that the MPC’s decision was “disappointing.”

“The BCC’s economic survey was very positive and it would appear that the economy is showing signs of picking up.

“However, in relation to the manufacturing sector, which is still very fragile, in spite of positive signs, it is critically important to nurture the upturn and avoid potentially damaging actions.

“The whole psychology of hitting the recovery on the head before it gains momentum is something that needs to be challenged,” he said.