BUSINESS leaders last night urged the Bank of England's rate-setting committee not to make a habit of raising interest rates, after it announced the second increase in three months.

The monetary policy committee was widely tipped to push rates up from 3.75 per cent to four per cent, and it duly obliged.

In the main, the decision was accepted, but organisations were quick to argue against the rise being the first of a run of increases.

The Engineering Employers Federation (EEF), the manufacturer's organisation, repeated its concerns about the potential impact on the exchange rate, particularly the dollar.

It said that while the picture for manufacturing had improved in recent months, the strength of the upturn remained uncertain.

Alan Hall, EEF Northern regional director, said: "While manufacturers had not given the green light for an increase, they will understand this decision but hope the Bank continues to tread cautiously.

"The weakness of the dollar may take the steam out of any recovery and companies will hope this increase does not fuel further expectations of higher rates in the short term."

George Cowcher, chief executive of the North East Chamber of Commerce, said: "We were disappointed with the rate rise in November and said at the time we hoped it was not the beginning of an upward trend that would bring yet more uncertainty to the North-East's manufacturing and retail sectors.

"Here we are, just two months on, and already facing another rise detrimental to local business growth. We think it is premature and we urge the Bank of England to hold off on any further rises and give us some breathing space."

Not all sectors of industry accepted the rise so grudgingly.

The Institute of Directors (IoD) said the MPC was merely attempting to re-balance the UK economy as painlessly as possible.

Peter Allan, chairman of the North-East Region of the IoD, said: "The shouts from the Bank of England are getting louder. The Bank wants to change consumer expectations in order to slow household spending, house price growth and debt accumulation.

"If UK consumers listen and respond, interest rate rises may only need to rise another half point.

"If they refuse to listen, this economic cycle could get out of control.

"We remain confident that the UK economy can be successfully re-balanced with interest rates peaking at 4.5 per cent."

Digby Jones, CBI director-general, said: "Over the coming months the Bank must stick to a strategy that is well-signalled, well-explained and gradual.

"That is the way to ensure the stability business needs."

* The European Central Bank left rates on hold at two per cent yesterday, which analysts said showed the bank did not believe the euro's strength would derail recovery on the Continent.