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Interest rates have been dramatically raised a quarter of a percentage point to 5.25 per cent in a widely-unexpected move by the Bank of England.

The vast majority of analysts had not even entertained the idea of a January rate rise, with the Bank's monetary policy committee (MPC) predicted to wait until February or even March to up rates.

But the MPC has moved to combat rising inflationary pressures in Britain, due to strong growth in output and demand, as well as the flow of credit and broad money.

"Sterling has risen and oil prices have fallen back. But the margin of spare capacity in the economy appears limited, adding to domestic pricing pressures," the Bank said in a statement accompanying today's decision.

When the Bank's last inflation report was published in November last year, the same month that interest rates were upped a quarter of a per cent to five per cent, consumer price index (CPI) inflation stood at 2.7 per cent, and the MPC today said that this is expected to move further away from the government's two per cent target in the coming months.

"Relative to the November inflation report, the risks to inflation now appear more to the upside," the statement went on to say.

"Against that background, the committee judged that an increase in bank rate of 0.25 percentage points to 5.25 per cent was necessary to bring CPI inflation back to the target in the medium term."

Typically the Bank awaits the publication of its quarterly inflation report before raising interest rates, as it did in both August and November, and today's decision is made all the more surprising given that extensive data on crucial Christmas spending levels will not be available until the spring.

Commenting on today's decision, the Confederation of British Industry (CBI) said the Bank had reacted in a "disappointing" manner to speculated wage increases.

"If part of the intention was to dampen wage increases, it is doubtful a rate rise will have the desired effect," said the trade association's economic adviser Ian McCafferty.

Howard Archer of research firm Global Insight admitted that the decision had come as a "real surprise".

"We had expected interest rates to rise again, we thought the Bank of England would delay acting until at least February when it had a clearer idea of what was happening in the 2007 pay rounds and just how strong consumer spending was over the Christmas and new year period," the chief UK and European analyst added.