Bank raises interest rate to 5.5%

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The Bank's Monetary Policy Committee (MPC) hiked its base rate from 5.25% to 5.5%, the fourth quarter-point rise since August.

The move had been widely expected after inflation hit 3.1% in March, forcing the Bank's Governor to write an explanatory letter to the Chancellor for the first time.

The increase is likely to add an estimated £16 a month to the average mortgage bill for households with a typical £100,000 mortgage.

The MPC said in a statement: "Lower gas and electricity prices and weaker import price inflation mean that CPI inflation is likely to fall back to around the 2% target in the course of this year. But the margin of spare capacity in firms appears limited and there are signs that businesses are more able to push through price increases.

"Relative to the 2% target, the risks to the outlook for inflation in the medium term consequently remain tilted to the upside. Against that background, the committee judged that a further increase in Bank Rate of 0.25 percentage points to 5.5% was necessary to meet the 2% target for CPI inflation in the medium term."

The four rate rises since August have seen average mortgage bills jump by £63.79. Union leaders called on the Bank for a reprieve for homeowners to give the hike enough time to take effect before a further rise.

The TUC's head of economics and social affairs Adam Lent said: "As mortgage payments rise, many will be worried about how far the family budget is going to stretch over the coming months. A decent period of interest rate stability would now be very welcome."

The CBI also called for a period of respite after fears over wage increases failed to materialise.

Ian McCafferty, chief economic adviser at the CBI, said: "While we fully accept the need for (Thursday's) rate rise, we see no reason for a further increase at present, as the impact of the 1% increase in rates since last August should be sufficient to keep inflation pressures into 2008 under control."