Interest rates were raised 25 basis points in England and mainland Europe on Thursday, catching analysts off guard.

The Bank of England’s Monetary Policy Committee voted to raise the official bank rate paid on commercial bank reserves by 25 bps to 4.75%. It noted that the pace of economic activity has quickened in the past few months, the margin of spare capacity in the economy appears small, and inflation has picked up as well.

“Against the background of firm growth, limited spare capacity, rapid growth of broad money and credit, and with inflation likely to remain above the target for some while, the Committee judged that an increase of 0.25 percentage points in the official Bank rate to 4.75% was necessary to bring CPI inflation back to the target in the medium term,” it said.

The BoE’s last rate move was a 25 bps cut to 4.5% last August. CIBC World Markets called today’s hike a surprise, “not in terms of direction or size of the move, but because of the somewhat questionable timing.

“This comes at a time when there are still just seven members on the MPC, after rate hikes were NOT even discussed in July and with not the slightest hint of an imminent rate move in recent BoE members’ remarks. Admittedly, the fundamental case for a rate move has increased of late, but we believe that the bank could have waited a while longer (and see how much of the recent surge in activity levels was World Cup related) before pulling the trigger on rates,” it says.

“Overall, we see today’s rate hike more as a pre-emptive move at times of rising inflation jitters among central bankers than the beginning of an aggressive tightening cycle, with rates now likely to be left on hold for a
while,” CIBC said.

Meanwhile, in Europe, the Governing Council of the European Central Bank also raised its various key lending rates 25 bps.