The Bank of England has raised its base rate by a quarter of a percentage point to 4.75%.
The move comes amid evidence of accelerating economic growth which could fuel inflation in the months ahead. The rate rise will also be seen as an attempt to cool the UK's booming property market, and rein in soaring consumer debt levels.
The Bank has now pushed through five quarter-point rises in eight months.
The increase in rates means higher repayments for businesses and consumers who have borrowed money, including Britain's millions of mortgage holders.
It also means that savers will get better returns on the money they put aside.
Business groups said higher rates would hamper British companies' performance, and called on the Bank to hold fire in the months ahead.
"Interest rate overkill would have damaging consequences," said David Frost, director general of the British Chambers of Commerce.
Aside from the impact of higher loan repayments, businesses fear that rising rates will increase the value of sterling against other currencies, making their goods more expensive in export markets.
Manufacturers' association EEF said the latest increase would also put companies facing higher costs because of soaring oil prices under added pressure.
"Manufacturers will now expect a pause for breath to assess the impact of the recent rises at a time when they are faced with rising costs for energy and other raw materials," EEF Director General Martin Temple said.
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