The Bank of England has increased interest rates by 0.25 per cent amid evidence of a continuing boom in house prices and consumer spending.

The monetary policy committee announced its latest decision on Thursday but the move had been widely expected.

Following a slight slowdown in the rate of increase in early 2004, the Spring saw an upsurge in house prices as buyers chased too few properties.

Evidence also indicates that the consumer boom in the high street is continuing despite an 0.25 per cent increase in rates in February.

Mortgage lending rose in March at the sharpest rate on record, while retail sales and output rose in April, according to the latest data.

Manufacturing has also bounced back in recent months, leading analysts to suggest the sector could withstand a modest increase.

Last week the chancellor appeared to signal his support for an increase when he addressed business leaders.

Despite fears over the electoral effects of mortgage increases, Gordon Brown pledged his support for "our monetary authorities in the difficult choices they have to make".

But Brown will be hesitant to back any dramatic increase in rates.

According to Conservative sources, the Tory leadership believes the government's reputation will be undermined by any significant increase in mortgage rates.

The Tories intend to present any pre-election increase in mortgages as evidence of the chancellor's stealth taxes - and will warn there would be further increases in both tax rates and interest rates if Labour is returned to office.

Reaction

But the 0.25 per cent increase appeared to have the backing of business.

David Frost, director general of the British Chambers of Commerce, said: "The financial markets expected today's rise and we are not surprised.

"We understand the difficulties facing the MPC in the face of house price inflation and record personal debt.

"But we note recent remarks from some MPC members that it is not their aim to control house prices.

"Having decided to raise rates today, we urge the MPC to maintain a cautious stance in the coming months."

The CBI also accepted there was scope for monetary policy to shift to a "more neutral" level.

But John Longworth, head of the CBI's survey panel, added: "The Bank must be careful not to stifle the economic recovery by abandoning its well-signalled, gradualist approach to rate rises."

The City has effectively "priced in" a series of small rate hikes - expecting them to peak at around five per cent in mid-2005.

The Council of Mortgage Lenders also accepted the need for a rate rises.

"Nearly two years ago we said that a modest rise in rates was needed to reduce the risk of worse pain later," said director general Michael Coogan.

"The same message is equally true now, and so we expected the MPC to act today.   

"Although never welcome, higher interest rates are now a necessary evil to encourage a gentle slowdown in the housing market."