Sterling rallies after shock UK base hike

Sterling rallied to $1.9510 against the dollar and 0.9655 against the euro after the shock decision by the Bank of England to raise UK interest rates to 5.25% from 5% in an effort to curb inflation.

Analysts had been anticipating a rate rise in the near future, although they expected policymakers to wait until next month to take action.

Consumer price inflation has recently risen to 2.7%, the highest level in more than a decade.

Policymakers increased the cost of borrowing twice last year in an effort to stem inflationary pressures.

The news will come as an unwelcome surprise to many homeowners. It will add GBP16 to the monthly payments of those with a GBP100,000 repayment mortgage.

But the rise will be welcomed by savers if banks and building societies pass on the increase to their savings rates.

In a statement announcing its decision, the Bank of England said it expected consumer inflation to rise further in the near future.

Inflation is already well above the government’s 2% target and some analysts believe it will exceed 3% when the latest figures are published this month.

Employer groups expressed disappointment at the move, saying it could harm already struggling businesses.

The FTSE 100 fell on the news amid concerns that the rate rise could constrain companies’ growth and slow the housing market.

The Bank of England has, in the past, announced rate rises in the same month as it published quarterly inflation figures but this time decided to make its move earlier.

The Institute of Directors described the move as “tough but wise”.

“Inflation is well above target,” said Graeme Leach, its chief economist. “The Bank of England‘s pre-emptive strike looks sensible.”

In a separate move, the European Central Bank held its main eurozone base rate at 3.5%.