The Bank of England has announced that it has raised interest rates by 0.25 per cent to 5.75 per cent.

The decision by the Monetary Policy Committee (MPC) to increase in the base rate was expected following last months MPC decision to freeze rates at 5.5 per cent was agreed by a vote of only five members to four.

The MPC warned that inflation remains a danger, saying “most indicators of pricing pressure remain elevated”.

Commenting on the decision, The Scottish Chamber of Commerce has called on the government to take a fresh look at its economic policy.

Garry Clark, the policy manager of Scottish Chambers of Commerce, said: “With the former Chancellor now in Number 10 and a new incumbent at the Treasury now in place, business is looking for reassurance of the continued stability of our economy. Perhaps now is an appropriate time for government to take a step back and examine whether the MPC’s monthly manipulation of interest rates is the most effective means of addressing inflationary pressures in a 21st century economy.

“With CPI inflation running above the government’s 2% target for over a year, it was perhaps inevitable that we would see a further rise in interest rates this month. Significantly, there is now an ominous gap between CPI inflation at 2.5%, and RPI inflation at 4.3%. This divergence has grown substantially since the autumn of 2005 and is worrying in terms of the possible effects on wage settlements over the coming year.

“Four previous interest rate rises in the past year have failed to narrow this gap and it remains to be seen whether a further quarter point rise will be enough to rein in inflation or whether a rise to 6% by the end of the summer will be implemented with a view to meeting government targets. We simply cannot afford to put recent encouraging growth levels at risk, and by using interest rates alone as the tool to ratchet down inflation, we now have rates consistently above our Eurozone, Japanese and US competitors, placing further upward pressure on exchange rates and potentially damaging our export sales.”

CBI Scotland has called for a “long pause” following the latest rise. Director Iain McMillan said: “A further rise today was widely expected, and the Bank is clearly taking a tougher stance now to avoid the risk of more tightening later in the year.

“This is the fifth rate rise in a year and there are growing signs that the medicine is starting to work. Wage growth has stayed subdued, the housing market appears to be slowing, and high street sales growth is weakening. A slower economy later this year would make it unlikely that the recent ability of companies to push up prices will endure.

“Businesses are concerned that any move to six per cent would be overkill, so now is the time for The Bank [of England] to leave a long pause to allow the economy to adapt to these new levels.”

Shelter Scotland said that the latest hike in the interest rate means people in Scotland could be over £100 a month worse off than this time last year, and warned this could leave some homeowners close to their financial limits and struggling to cover the cost of household essentials like food and utilities.

Archie Stoddart, director of Shelter Scotland said: “With people already overstretching themselves just to get on the housing ladder, this rate rise will push many to their financial limit, leaving them facing mortgage arrears, repossession and even homelessness.

“For many though, house prices are simply out of their reach. Housing is becoming increasingly unaffordable for ordinary families. We must see a commitment from our recently elected politicians to find ways to give people real choices about how and where they live. Housing is central to our nation's health, wellbeing and economic future.”

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