Editor's view: Up, up and away?

Many home and business owners are looking a little peaky after Thursday's interest rate rise, which accompanied the promise of fresh hikes in future. But is there real cause for alarm?

The vast majority of economists predicted the quarter-percen increase, which took the basic cost of borrowing to 4.0%, but it nevertheless came as a nasty sting for some indebted Brits.

Business groups were split on the move, some arguing that it was premature and threatened to damage the economic recovery; others saying it was a sensible and timely move that would avoid more drastic adjustments later on.

In a statement accompanying its decision, the Bank of England's Monetary Policy Committee (MPC) blamed recent above-trend economic growth and record high debt among consumers for the move.

"Household spending and borrowing have been resilient, and the housing market remains strong," it said. "Although sterling has appreciated, continued growth above trend means that inflationary pressures are likely to pick up gradually over the next couple of years."

However, the group is careful to play down speculation of a quick series of rate hikes. This is out of the question at the moment because there are too many conflicting variables for the Bank to juggle.

For example, the MPC wants to prevent more people from taking out big loans, so it raises the benchmark cost of borrowing as a deterrent; but an unsavoury by-product of this is that repayments will rise for those already in debt.

Higher mortgage rates make mortgages less affordable, something which should subdue house price inflation but will also make borrowing money harder for first-time buyers.

This is just one of many balancing acts that the MPC must perform, and it is also the reason why rates will not shoot up this year.

"[We expect] that inflationary pressures will remain relatively muted," said Ian Mitchell at the Centre of Economics and Business Research, an economics think tank based in London.

"Despite the acceleration in economic growth, interest rates will remain low in the short to medium term. We anticipate rates finishing 2004 a or below 4.5%."

Controlling inflation is the MPC's central remit, but it must also be careful not to unseat the UK's economic recovery by forcing up the value of sterling and making British goods less competitive overseas.

Some analysts believe that, with house prices continuing to rise, nudging up interest rates will make little impact on mortgage borrowing; but i will have a pronounced negative affect on business activity and confidence.

"The MPC's decision is very disappointing," said David Frost, chief executive of the British Chambers of Commerce. This rise is premature and is likely to hit recovery over the head before it gains momentum."

"This is premature," agreed Trades Union Congress chief economist Ian Brinkley. "The Bank could have afforded to wait until it had confirmation tha the expected recovery in manufacturing is actually happening.

"There are no signs of inflation taking off. The gap between UK and European interest rates is now set to widen with the danger of a return to an uncompetitive pound and even more pressure on manufacturing exporters."

MPC members are, no doubt, aware of this unpleasant side-effect and will aim to avoid hurting businesses too much in their efforts to control house prices and consumer debt.

Indeed, one of the group's stated objectives is to shift the UK's main growth driver from high street sales to exports and investment in business. And with tentative evidence that most sectors of the economy are growing powerfully, it looks like this could be achieved without undue risks to the economy.