IN A historic move, the British Chancellor of the Exchequer, Mr Gordon Brown, granted the Bank of England independence yesterday by allowing it to determine interests rates, rather than politicians.

The surprise announcement followed Mr Brown's expected decision to increase interest rates by a quarter of a point, to 6.25 per cent, which should ensure inflation remains low. From now on, the bank's governor, Mr Eddie George, and a selected nine-member committee will set the rates, guided by the British government's inflation target of 2.5 per cent.

Most of the larger UK building societies promptly increased their mortgage rates in line with Mr Brown's rise. A spokesman for the Halifax, Britain's largest society, said the housing market was recovering and stressed that this increase will not effect it.

Mr Brown agreed the move was the "biggest change" to the Bank of England since its foundation over 300 years ago but insisted it would now prevent politicians from misusing interest rates to win votes.

However, the British government will, in exceptional circumstances, retain the power to over-ride any decisions. "This will ensure that decisions are taken on the long-term interests of the economy and not on the basis of short-term political interests."

The Prime Minister, Mr Blair, described the move as the "biggest decision in economic policy since the War" and hoped it proved to the British people that the government was determined to act in the best interests of the country.

Although taken by surprise, the City welcomed the move, with the FTSE 100 index breaking through the 4,500 level. The Confederation of British Industry and the British Institute of Directors also praised the Chancellor, stating that the move will lower the cost of finance for industry and that the Bank of England was "better placed to gauge business needs" than politicians.

However, the Shadow Chancellor, Mr Ken Clarke, predicted the move would lead to job losses and suggested Mr Brown would regret his decision. He also insisted it was unnecessary to raise interest rates because the economic situation remained the same.

"Obviously, in the national interest, I trust they get it right. What you are going to see is, undoubtedly, tighter monetary policy than you might otherwise have got from a perfectly responsible Chancellor of the Exchequer who is prepared to take the broadest possible view of what is in the interests of British industry and commerce and the people who work in it," he added.