The official Bank Rate paid on commercial bank reserves has been raised by 0.25 per cent to 5 per cent.
The move is intended to counteract inflation rises - 2.4 per cent at present - that are led by higher utility bills, and above the Government's target of 2 per cent.
Higher interest rates will add pressure on the millions of mortgage-holders and borrowers, who will see their monthly repayments rise - although it will be good news for savers.
Consumer debt levels are increasing, according to the latest Government figures for England and Wales, and higher interest rates coupled with a possible slow down in consumer spending could herald major problems for retailers in the new year.
According to the British Retail Consortium, the quarter point interest rate rise is premature and likely to be unhelpful to consumer confidence over the next few months.
British Retail Consortium director-general Kevin Hawkins said: 'A rise is not needed now. With retailers reporting year-on-year inflation of only 1.5 per cent and price competition intense, it's clear inflationary pressure is not coming from the high street.
'The Treasury, City and independent economists are forecasting Consumer Price Index inflation of only two per cent for 2007. By piling another rise on top the Bank has made it more likely economic activity will be depressed over the next six months.'
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