Financial markets were startled and City economists wrong-footed as the Bank’s Monetary Policy Committee ordered its third quarter-point rise in the base rate in five months, lifting it to a 5½-year high of 5.25 per cent.

The rate rise means that borrowers with variable rate mortgages, some seven million people, or 60 per cent of homebuyers, will pay an extra £14.66 a month on a £100,000 loan.

Three rate rises in five months have pushed the monthly repayments on a £200,000 variable rate loan up by £86 since August.

The Bank’s unexpected move sparked intense speculation over what led it to act.

Many economists scrambled to raise forecasts of how far rates will now rise, with 18 out of 41 polled by Reuters warning that at least one further increase this year is on the cards. Some suggested that this could even come in a back-to-back rise next month.

Frenzied market reaction saw the pound’s overall value soar to its highest in more than ten years as its trade-weighted index hit 105.2. Sterling hit an 18-month high against the euro, at 66.4p, and rose more than 1 per cent against the dollar, to $1.9538.

Trading volumes on the interest rate futures market set records, but the stock market’s response was muted. The FTSE 100 index closed up 69.4 points, at 6,230.1, having earlier shed about 30 points. City surprise was heightened as the MPC changes rates only rarely in months when it is not due to issue its quarterly Inflation Report, as it will next month.

This was the first time since late 1999 that the Bank has raised rates outside an Inflation Report month and when the City had not otherwise expected a move. Economists suggested that the culprit may be next Tuesday’s inflation figures, which the Bank will have seen.

With consumer price inflation already well above its 2 per cent target, at a ten-year high of 2.7 per cent, there is a clear risk that this could rise above 3 per cent. That would require Mervyn King, the Bank’s Governor, to write an explanatory letter to the Chancellor. Any letter will be easier to write if the MPC has already responded to such an inflation overshoot.

The Bank’s move was also seen as a pre-emptive strike against the threat of inflationary pay deals in new year wage negotiations now under way, a key worry for the MPC.

The Bank’s statement said that the economy was growing at a “firm pace”, and pointed to rapid growth in credit and money supply. The pound was up, and oil prices had fallen, easing inflationary pressures, but it said that scant spare capacity was “adding to domestic pricing pressures”. Inflation risks were now “more on the upside”.

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