The Bank of England has raised interest rates by 0.25 per cent.

The monetary policy committee announced a quarter point increase taking headline rates of borrowing to four per cent.

The announcement by the committee followed a two-day meeting on Thursday.

Cautious approach

Whilst the MPC backs a cautious approach, it had signalled that rates would rise.

Most commentators expected interest rates to exceed four per cent by the year end - and some predict they could go as far as five per cent by late 2005.

"A buoyant economy and a helpful background for the UK consumer should mean a continued steady stream of rate increases over the next year or so," said Philip Shaw of investment bank Investec.

The European Central Bank also releases its monetary policy decision later today.

Reaction

The Council of Mortgage Lenders said "most households should have no difficulty absorbing this level of modest increase".

"But this is likely to be the first of several rate rises this year, and we expect rates to end the year at 4.5 per cent," head of research and analysis Bob Pannell said.