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Rate rise surprises market

The Bank of England’s decision to raise interest rates by a quarter of a point to 4.75 per cent caught the markets by surprise.

The monetary policy committee says last week’s move is in response to its expectation that inflation will remain above the 2 per cent target for at least the short term.

This was the first rate change since August 2005 and the first rise in two years.

Hamptons International technical director Jonathan Cornell says mortgage clients on tracker or discounted deals will see monthly mortgage payments rise. A 200,000 interest-only mortgage will rise by around 41 a month.

Principality Building Society managing director Tracy Morshead says experts were divided on whether the MPC would make a move this month and the industry hopes this is a one-off rather than the first of a series of rises that could significantly slow down the housing market.

F&C head of asset allocation Paul Niven says the futures markets priced in the rise in the fourth quarter but since the rise, interest rate futures markets are pricing in a further increase to 5 per cent by the end of the year.

John Charcol senior technical manager Ray Boulger says: “Speculation about a base rate move has been rife in the last month, partly because the next quarterly inflation report is out next week. This suggests the MPC was particularly concerned about the increase in the consumer price index to 2.5 per cent and expectations that rising energy costs will push it higher.”

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