Interest rates raised to 4.25 per cent

The rise, the third in the past seven months, was widely anticipated due to rising levels of consumer debt, although business lobbyists have warned against sharp increases during the economic recovery.

Although many small firms still need time to recover from the downturn of the past two years, most business groups said they understood the need to edge rates higher for the long-term health of the economy.

Analysts have predicted a steady rise in interest rates since they hit a 50-year low in October when the Bank of England attempted to kick-start the economy.

Ian McCafferty, chief economist at the Confederation of British Industry (CBI), said that businesses recognise that interest rates will need to rise to a more neutral level over the next 12 months.

“Companies will be pleased that the Bank has continued its well-signalled, gradual approach.

“But, with inflation well under control, firms would have serious concerns if this move were to herald the start of more rapid rises.

“The two previous increases have not yet had time to take full effect and business is still concerned that sterling’s renewed strength could hold back the recovery,” he said.

Steve Radley, of the manufacturing body the EEF, said that manufacturers will understand that there will be a short-term price to pay for greater economic stability in the longer-term.

“While higher rates are not particularly welcome at such an early stage in recovery, manufacturers understand that this rise may help to preserve economic stability in the longer run,” he said.

Nick Goulding, of the Forum of Private Business (FPB), said that above all, a stable economy is good for business.

“Although many in the manufacturing industry are concerned that large increases will stall the recent resurgence of the sector, its good performance, despite the strength of sterling, indicates that an interest rate rise should not prove too damaging,” he said.

Graeme Leach, Chief Economist at the Institute of Directors (IoD), said that the performance of the UK economy suggests that interest rates have had little impact.

“Consequently the Bank of England needs to squeeze a little tighter. When UK households begin to feel more pain we should then begin to see the economic gain as the economy re-balances,” he said.