Forum Brief: Interest rates

The Bank of England has increased interest rates despite warnings that the move could hit Britain's struggling manufacturing sector.

The monetary policy committee (MPC) announced that rates are to rise by 25 basis points, the first upward move since February 2000.

Howard Flight, the shadow chief secretary to the Treasury, said: "The Bank of England has no doubt been influenced by the outlook for inflation which is running in excess of seven per cent in the public sector.

"At a time of high debt, this rise will be especially worrying for individuals and industry. Mortgages and other borrowing are at record levels and this increase will be a blow to those with high levels of debt.

"Industry is already suffering under Labour so a rise in the cost of borrowing will affect confidence and the prospects for employment.

"We have had 60 tax rises under Labour, and this increase will add to many people's burdens. People want to know why they are not getting the improvements in public services that they were promised in return for these higher taxes."

Vince Cable, Treasury spokesman, said: "This rate rise is going to cost those with an average outstanding mortgage over £150 extra a year. Anyone who took out the average new mortgage of £93,000 over the last few months will now pay over £230 more a year.

"The Bank is trying desperately to create a soft landing for the seriously overvalued housing market, while not crushing the hard pressed manufacturing sector.

"With debt at record levels, this rise looks like the start of a trend rather than a blip and those who have borrowed at the limit of their means could be hit hard.

"The Bank cannot be expected to manage the whole economy when its focus is inflation targets. The chancellor must urgently find other ways to smooth out the imbalances.

"The most pressing issue for the chancellor to address is the failure of regulation that has allowed banks to lend irresponsibly and fuel unsustainable levels of debt."

Forum Response: Institute of Directors

Graeme Leach, chief economist at the Institute of Directors, said: "The Bank of England has finally run out of patience with UK consumers.

"Having waited patiently for UK households to bring their borrowing under control, it has finally decided to intervene. The price of doing nothing was deemed to be too great.

"With the ripple effect of stronger house prices extending north across the country, continued rapid growth in mortgage equity withdrawal seemed inevitable."

Forum Response: Council of Mortgage Lenders

Michael Coogan, director general, said: "This rate rise reverses the rate cut in July, which was made on the basis of GDP estimates which have since been revised upwards.

"But it is far from clear whether today's move is the start of a concerted hike in rates over the coming months.

"Much will depend upon how higher rates feed through into household borrowing and spending decisions.

"Given the uncertainty, mortgage borrowers should take a cautious approach and ensure they have enough flexibility to cope with further rate rises if they occur.

"The CML and other commentators have been expecting the housing market to show signs of cooling for some time, but house price growth has continued to remain strong.

"Modest increases in mortgage costs are a necessary part of the market's adjustment to more sustainable conditions."

Forum Response: Construction Products Association

Allan Wilen, economics director, said: "This is the first rise in interest rates since February 2000. Whilst not unexpected, this upward move will only serve to intensify the pressure on UK construction product manufacturers from overseas suppliers and worsen the current trade imbalance.

"Whilst there has been sustained growth in the construction product industry, as highlighted in our recent Construction Industry Trade Surveys, this growth is being driven primarily by government expenditure.

"A sharp rise in interest rates would hit private sector construction, including housing, hard and would damage overall industry growth."

Forum Response: Building Societies Association

Rachel Blackmore, external affairs manager, told ePolitix.com: "It is good news for savers who have not had an easy time of it and if borrowers are worried about mortgage rate repayments and they haven't yet fixed it might be worth them doing so."

Forum Response: National Consumer Council

Ed Mayo, chief executive of the National Consumer Council, said: "This is a wake-up call for the one in five people on the edge of the debt precipice. Now is the time to change our spending habits, re-assess our budgets and start to live within our means.

"It should not be forgotten that this is good news for savers. We urge all banks to pass on the full benefits."

Forum Response: British Retail Consortium

Bill Moyes, director general, told ePolitix.com: "We are not surprised or unduly concerned at the Bank's decision to increase interest rates.

"Consumers are not only benefiting from low interest rates but a stable interest rate climate. The rate increase is understandable but it should be a one-off measure and not the start of an upward trend in raising rates further.

"There is still a good deal to be had on the high street and a modest rise should not stop our customers enjoying their Christmas shopping and the New Year sales."

Forum Response: National Association of Estate Agents

Melfyn Williams, president, and Peter Bolton King, chief executive, told ePolitix.com: "Whilst the news of the rate rise has not come unexpected, the NAEA hope that this is not a start of an upward only trend for the next few months, particularly in view of the many first time buyers who have already committed themselves to their limits to purchase a home.

"At the end of the day, rates are still low, indeed they remain lower than NAEA predictions at the beginning of the year and property can still be purchased at an affordable borrowing rate."