The move, which was widely expected by Financial markets,came shortly ahead of a decision by the European Central Bank which was expected to raise interest rates by up to half a point.

The MPC stunned markets two months ago by hiking rates a quarter-point when it had been expected to leave them at 22-year lows of 5.0 per cent. But a poll by Reuters last Friday found 25 of 33 analysts surveyed were predicting rates would go up this month, with almost all expecting a quarter-point rise.

The rise in the cost of credit comes against a background of increasing evidence of inflationary pressures building in many sectors of the economy in spite of inflation being subdued at the moment. House prices increases are now firmly in double digits, raising the spectre of a housing boom like that of the late 1980s, which ended in a spectacular bust.

The rate hike is likely to mean higher monthly payments for variable-rate mortgage holders and a rise in costs for industry. But it will also mean better returns for savers.

Markets reacted calmly to the decision. The FTSE 100 share index extended early moderate gains to be 36 points up at 6,316.8 minutes after the announcement.

The pound was little moved against the dollar or euro but interest rate futures gained ground on the perception that the MPC was raising rates in good time which may prevent them having to go too high.

Industry was quick with its response.

"The MPC has conceded to the inflation prophets and is continuing to apply the logic of the inflation battle of the 1980s to the economic environment of the 1990s," said Martin Temple, director general of the Engineering Employers' Federation.

"Interest rates are too blunt and inexact an instrument to manage the whole economy," he added.

Exports have been hit by the strength of the pound in recent years and it strengthened again recently, threatening to cripple the nascent recovery in Britain's beleaguered manufacturing sector. Interest rate rises tend usually to boost a country's currency on foreign exchanges.

The MPC, which has now changed rates 14 times in 30 monthlymeetings since it was set up in 1997, made no statement accompanying its decision.

British interest rates were slashed at the end of last year and into this year from 7.50 per cent to a 22-year low of 5.0 per cent in a bid to prevent the economy tipping into recession.

But growth has since accelerated much quicker than had been expected and in September the MPC raised rates a quarter point in what it said was a pre-emptive strike.

Economists now widely assume it is in a tightening cycle and will put rates up to between 6.0 and 7.0 per cent by the end of next year.

Its move this time means rates are now unlikely to rise again until February next year, however, as analysts believe the committee is unwilling to change policy around the turn of the millennium because of potential market disruptions from that event.