The Bank of England’s shock decision to raise interest rates to 5.25% this afternoon has left both the City and the property industry reeling.

Less than a week after most of the industry returned to work following an extended Christmas break, the Monetary Policy Committee announced it had raised the cost of borrowing by a quarter of a percentage point in a bid to lower inflation.

The increase, which takes interest rates to their highest point in more than five and a half years, has wrong-footed both the industry and the City’s top analysts who predicted the next rise would occur in February ‘at the earliest’.

In a statement, the Bank said: ‘It is likely that inflation will rise further above the target [2%] in the near term, but then fall back as energy and import inflation abate. Relative to the November Inflation Report, the risks to inflation now appear more to the upside.’

Residential investors and first-time buyers are expected to be hit hardest by the rate rise. However, there are fears that smaller commercial investors who tend not to hedge their interest rate risks may not have factored in such a surprise increase in the cost of borrowing and could struggle to deal with the consequences.

Tony McGough, head of forecasting at Jones Lang LaSalle, said: ‘The year ahead now looks as if it will certainly bring in another rise. Let us hope that the Bank of England views 50bps to be sufficient, as rises above 5.50% will start having an impact on the economic and financial environment, and therefore also on expectations for property through 2007-08.’