The Bank of England's monetary policy committee (MPC) yesterday raised interest rates for the second time in three months, this time by a quarter point to 5.5 per cent, in an effort to ward off inflationary demons.

The MPC stunned markets two months ago by raising rates a quarter point when it had been expected to leave them at 22-year lows of 5 per cent.

But the rise in the cost of credit comes against a background of increasing evidence of inflationary pressures building in many sectors of the British economy despite inflation being subdued at the moment.

House price 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 Bank of England seems in no mood to take chances this time round.

The rate rise 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.

Mortgage lenders did not immediately follow the Bank of England's decision, saying they were reviewing their rates.

Markets liked the decision. The FTSE 100 share index extended early gains to be 64.3 points up at 6,345.1. Sterling was steady against the dollar and 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.

British industry, however, was not so keen. "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 Mr Martin Temple, director general of the Engineering Employers' Federation.

Exporters have been hit by the strength of sterling in recent years and it strengthened again recently, threatening to cripple the nascent recovery in Britain's beleaguered manufacturing sector. Economists now widely assume the MPC will put rates up to between 6 and 6.5 per cent by the end of next year.