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BoE increases rates to 4.75pc

The announcement shocked the foreign exchange market where sterling surged to 1.8868 dollars, the highest point since June 5, from 1.8721 earlier. The euro fell to 0.6772 pounds, last touched on May 16, from 0.6813 before the news.

Central banks around the world are currently tightening monetary policy in the face of rising inflation and strong economic growth.

The European Central Bank increased eurozone borrowing costs by a quarter-point to 3.0 per cent on Thursday, shortly after the Bank of England’s move.

The BoE said that “the pace of economic activity has quickened in the past few months”, and that 12-month inflation was “expected to remain above the 2.0 per cent target for a while” owing to soaring domestic energy bills.

Most analysts had expected no change to the BoE’s “repo” rate — the rate of interest at which the central bank lends to commercial banks.

However, recent data showed Britain’s economy growing at the fastest quarterly rate for two years, while 12-month inflation soared to 2.5 per cent in June.

The country’s economy grew by 0.8 per cent during the second quarter of 2006 compared with the previous three months. June’s inflation reading, meanwhile, marked a nine-month high point and was significantly higher than the BoE’s government-set target of 2.0 per cent.

Minutes of the meeting, set for publication on August 16, will reveal the voting pattern of the bank’s rate-setting Monetary Policy Committee (MPC).

Economists admitted that the MPC had caught the financial markets off-guard in the latest decision.

“We are surprised as we had expected the MPC to hold off from raising interest rates until November, given the ongoing significant uncertainties facing both the medium-term inflation and growth outlooks,” Global Insight economist Howard Archer said.