Shock As Interest Rates Rise Again!

Analysts had been anticipating a rate rise in the near future, although they expected policymakers to wait until Feb 07 to take action.

The Bank of England's Monetary Policy Committee (MPC) was divided down the middle over the decision whether to raise interest rates this month, the minutes have shown.

The nine person committee voted five to four in favour of January's quarter of a per cent rise to 5.25 per cent. It also came to light that the governor, Mervyn King had the casting vote and was in favour of an increase. The vote was the closest since August 2005.

Consumer price inflation has recently risen to 2.7%, the highest level in more than a decade.

Policymakers increased the cost of borrowing twice last year in an effort to stem inflationary pressures.

The news will come as an unwelcome surprise to many homeowners and property investors. It will add £16 to the monthly payments of those with a £100,000 repayment mortgage.

But the rise will be welcomed by savers if banks and building societies pass on the increase to their savings rates.

'Surprise'

In a statement announcing its decision, the Bank of England said it expected consumer inflation to rise further in the near future.

Inflation is already well above the government's 2% target and some analysts believe it will exceed 3% when the latest figures are published this month.

"The timing is a surprise," said Ross Walker, UK economist with the Royal Bank of Scotland.

"What this perhaps tells us is that we have a nasty inflation number coming next week and they wanted to act pre-emptively."

Employer groups expressed disappointment at the move, saying it could harm already struggling businesses.

"If part of the intention was to dampen wage increases, it is doubtful a rate rise will have the desired effect," said Ian McCafferty, the CBI's chief economic adviser.