The descision comes as a shock to analysts who predicted policymakers would wait until next month to impement the 0.25 per cent rise.
Mehrdad Yousefi, Head of Intermediary Mortgages at Alliance & Leicester: A rate rise to 5.25 per cent at the start of the year has caught the market by surprise, particularly following a period of heavy consumer spending during the festive season. This rise comes a month or two earlier than widely expected as many were anticipating a rise in the first quarter of 2007, but not as early as this.
An increase in rates will signal a tightening of belts for some. Money markets are expecting a further rise in the first half of 2007 and this will impact on the pricing of fixed and base rate tracker mortgages.
For households already on a tight budget this will continue to put a strain on their finances. With bumper City bonuses and demand for property exceeding supply especially in London and the South East and consumer price inflation at its highest level for a decade the MPC needed to yank the reigns to try to slow down houseprice growth and inflation. Whilst each of the three base rate increases we have had since August last year has brought a relatively small increase to the cost of a mortgage, the combined effect of all three will undoubted start to hurt homeowners who arent on fixed rates.
Find a new mortgage deal
For those on the look out for a new fixed rate deal, it would be advisable to secure one now rather than adopt a wait and see approach. There are also still a number of great value base rate trackers available which are cheaper than short-term fixed rates for those whose financial circumstances are more flexible and able to withstand further rises.
Yuosefi said: It is widely anticipated that interest rates will not rise to more than 5.5 per cent in 2007, so homeowners should bear this in mind and ensure they will be able to withstand any future rises.
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