Higher interest rates are now a necessary evil to encourage a gentle slowdown in the housing market said the Council of Mortgage Lenders director general, Michael Coogan yesterday after the Bank of England Monetary Policy Committee raised the bank rate by a quarter point to 4.25%.

The CML believes a modest rate rise was needed to reduce the risk of worse pain later.

"The small rises so far have had only a limited impact on consumer behaviour,” said Coogan. “We continue to anticipate further staged rate rises through 2004 as the MPC seeks to fine tune monetary policy.”

“The cumulative impact will become more apparent as the year progresses - a one per cent rise in mortgage rates equates to around £60 a month for a typical £100,000 mortgage. Borrowers on variable rate loans should plan for higher mortgage costs and prepare accordingly."

No damage to the housing market

Peter Bolton King, chief executive of the National Association of Estate Agents says he expects no damage to be caused to the housing market buy the latest interest rate hike.

“The last quarter point hike did not affect the market one jot and we don't believe this rise will have any material effect except perhaps on first time buyers who will be further over-stretched,” he said.

Peter Bolton King continued: "The Bank of England is not charged with controlling the housing market but will have been worried that mortgage borrowing has surged by over £9bn in March up 1.2% from February and 15% from a year ago.”

“Clearly that sort of borrowing can not be sustained but we believe the housing market is buoyant and not over-heated in the present economic climate."

Investors and industry leaders content with BoE decision

Investors and industry leaders were pleased yesterday. John Goodfellow, chief executive of Skipton Building Society, said: “I'm sure investors will be glad to hear this news, which should build on some of the market leading rates we are seeing at the moment.”

“That said, I believe it is still a good market for borrowers, as mortgage rates remain relatively low. I expect we will see a run on fixed rate mortgages as, regardless of what the City predicts, the borrower on the street may see this rise as a sign of things to come and look to get the best deal they can now.”

Ian McCafferty, chief economic adviser for the Confederation of British Industry said: "Business recognises that interest rates will need to rise to a more neutral level over the next 12 months, so this rise is no surprise.”

"Companies will be pleased that the Bank has continued its well-signalled, gradual approach. That is the best way for the Bank to maintain economic stability, and to ensure that rates end the cycle no higher than they need to be.”