The Bank of England's Monetary Policy Committee has decided to raise the base rate by 0.25 per cent to 4.75 per cent, in a move which has shocked many experts.

Although a rise in interest rates was widely expected this year due to factors such as inflation levels running above government targets, most experts were predicting the rates rise to come later in the year.

The committee explained their decision, the first interest rate increase in 11 months, was a result of quickening economic activity and a limited margin of spare capacity in the economy.

It also mentioned the recent pick up of inflation to 2.5 per cent, which is above the target of 2.0 per cent, and the likelihood of it remaining above the target rate for quite some time due to inflationary pressures such as rising energy bills.

Borrowers with many types of loans are likely to be affected by the decision, which will see repayment costs increased.

The rate rise has been anticipated by the market for several months, and is in line with our forecasts," suggested a member of the Council of Mortgage Lenders, commenting on the decision.

While the rise may come as more unwelcome news for stretched borrowers, timely action by the Bank of England should restrict the extent to which further rate rises are required in future.

Bank holds interest rates at 4.75 per cent - 8th September 2006

Interest rate decision was six to one - 16th August 2006