Bank of England raises interest rate to 5.25%

The Bank of England’s Monetary Policy Committee today voted to raise the official Bank Rate paid on commercial bank reserves by 0.25 percentage points to 5.25%.

In the United Kingdom, output continues to rise at a firm pace. Domestic demand has grown steadily and credit and broad money growth remain rapid. The international economy continues to grow strongly.

Sterling has risen and oil prices have fallen back. But the margin of spare capacity in the economy appears limited, adding to domestic pricing pressures. CPI inflation was 2.7% in November.

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 judged that an increase in Bank Rate of 0.25 percentage points to 5.25% was necessary to bring CPI inflation back to the target in the medium term.

Mehrdad Yousefi, Head of Intermediary Mortgages at Alliance & Leicester: “A rate rise to 5.25 per cent at the start of the year has caught the market by surprise, particularly following a period of heavy consumer spending during the festive season. This rise comes a month or two earlier than widely expected as many were anticipating a rise in the first quarter of 2007, but not as early as this.

“An increase in rates will signal a tightening of belts for some. Money markets are expecting a further rise in the first half of 2007 and this will impact on the pricing of fixed and base rate tracker mortgages. For those on the look out for a new fixed rate deal, it would be advisable to secure one now rather than adopt a ‘wait and see’ approach. There are also still a number of great value base rate trackers available which are cheaper than short-term fixed rates for those whose financial circumstances are more flexible and able to withstand further rises.

“It is widely anticipated that interest rates will not rise to more than 5.5 per cent in 2007, so homeowners should bear this in mind and ensure they will be able to withstand any future rises.”