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Interest rate hike shocks experts

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The Bank of England stunned homeowners today by announcing to increase interest rates to 5.25 per cent.

With inflation running considerably above the government's target at 2.7 per cent, many forecasters had anticipated a rate rise, adding to the hikes in August and November, but few expected that the decision would come as early as this month.

Next week's consumer price index (CPI) figures are expected to reveal that inflation is currently running a full percentage point above the government's target of two per cent and today's move is considered a cautionary measure.

But this will be of no consolation to homeowners, who face an increase in their mortgage repayments as interest rates climbed to their highest levels since the second quarter of 2001.

Louise Cumming from Moneysupermarket said: "This will be a real blow to many homeowners who may not have factored in an additional base rate rise – indeed, many commentators failed to see it coming - so it is likely that some homeowners will have been caught short."

Peter Bolton King, chief executive of the National Association of Estate Agents (NAEA) criticised the decision as "clearly premature and extremely disappointing".

He accused the bank's monetary policy committee (MPC) of being too London-centric in its view of the housing market.

While the early indications for 2007 are that the housing market is performing well, the vast regional differences remain a concern, he said.

"I strongly urge the MPC to take the regional differences into consideration and not be led by the south-east when making future rate decisions as this approach could be extremely damaging to the market in underperforming areas," he added.

Global Insight agreed that the decision was a "real surprise" and claimed in a statement that as sprialling inflation was the primary cause behind the move, "there is clearly a very real possibility that interest rates could rise further", at least in the short term.

However, the financial research firm added that the future is not so bleak in the long term.

"We believe that modestly softer growth during 2007, intense competition through the supply chain, price conscious consumers and a strong pound will limit underlying price pressures and alleviate the need for further interest rate hikes," its statement read.

In spite of the previous two rises, the UK property market has been performing remarkably well of late. At the end of December, Nationwide announced that house price inflation was running at 10.5 per cent for the year, meaning that investors saw their assets grow in value by £45 a day, over three times the rate of 2005.

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