The Bank of England yesterday raised its main interest rate for the third time in four months by a quarter-point to 4.75 per cent as it continued to lead the way in tightening economic policy.

The European Central Bank left interest rates unchanged at 2 per cent yesterday, with the next move expected to be a tightening, while the US Federal Reserve is likely to raise rates by a quarter-point to 1.5 per cent next Tuesday.

The increase in UK rates was widely expected, as annualised growth is rising at its fastest pace since 2000.

Economists warned that another rise would soon be needed, although the timing was thrown into doubt yesterday by the tone of the bank's statement.

"Explaining its decision, the bank's monetary policy committee said output growth had been robust and business surveys pointed to continued expansion.

"With demand already high relative to the supply capacity of the economy, continued strong growth is likely to lead to rising inflationary pressures," it said.

Markets had feared a half-point rise, so futures and bonds rallied after the decision while the pound eased against the dollar and the euro.

All eyes will now be on next week's detailed growth and inflation forecasts, for a better indication of the next rise's timing.

A further rate increase is likely before the end of the year, with a final "insurance" hike possible in early 2005, according to Mr Austin Hughes, chief economist with IIB Bank.

Mr Hughes is expecting the current UK interest rate cycle to peak at around 5 per cent over the next nine months, thus ensuring that the UK property market does not suffer a sharp downturn.

He believes that the market will soon begin to focus on a downward turn in the cycle, thus placing some pressure on sterling.

This pressure will be heightened by the beginning of a rising interest-rate cycle in the euro zone, according to IIB's forecasts.

But the Bank of England's monetary policy committee's assessment that although the housing market remained buoyant, "there are now signs it is starting to ease, and the growth of consumption may be moderating" prompted others to scale down their expectations for back-to-back rises. British interest rates are now three times the level of those in the US, and more than twice as high as the euro zone's.

The ECB's move meant it had left rates unchanged for the 14th month running.

Analysts said a euro zone increase was unlikely for some time, despite the inflationary threat of higher oil prices.