FEARS of a hard landing for the British economy were growing last night after the Bank of England shocked the City and the business community by imposing an unexpected 0.25% increase in base rates to 7.5%.

The Bank, which has been divided on monetary policy since January, justified its change of heart by highlighting the upward pressure on private sector wages and the pound's recent retreat from its peak at the end of March.

Opponents of the move said the economy was already slowing down and the cumulative effect of the six rate hikes since the General Election would inflict further damage on the manufacturing sector which is already locked in recession.

The City took the news badly. At one point sterling gained more than two pfennigs on the German mark and the FTSE-100 share index dropped nearly 80 points. But calmer conditions were evident at the close of business with the pound a pfennig lower at about DM2.89 and the Footsie 37.6 points down at 5860.8.

The major mortgage providers were caught on the hop by the Bank. They stayed their hands on mortgage rates and said they would keep market conditions under review.

But an early indication of the pressures they will face came from the big Scottish life office, Standard Life, which said it would raise the top rate it offered to savers from 7.3% to 7.55% (on accounts of #60,000 or more). Later the Bradford & Bingley Building Society said it would increase rates on savings accounts by an average of 0.25%, but would hold its home loans rates until August 1.

The Nationwide, the largest of the surviving mutual building societies, said: ''We believe this should represent the peak and our long-term forecast is that rates should fall from here.''

David Kern, NatWest Group's chief economist, said he expected base rates to stay at 7.5% for the next three to four months and then fall back to 7% by the end of the year.

However, Adam Cole, UK economist at HSBC Securities, said the real significance of the latest rate rise was that it pushed back the first cut well into next year.

Richard Taylor, deputy chief economist at Royal Bank of Scotland, said: ''The risk of this strategy is that it may rekindle interest in sterling, just as a downward trend is being confirmed, and bring further misery to manufacturing industry. We must hope that we have now finally reached the peak in the interest rate cycle.''

The reaction of the business community was hostile. Kate Barker, chief economic adviser at the Confederation of British Industry, said the CBI was ''very concerned'' by the rise and warned it had struck a fresh blow against exporters.

''Although there are some short-term worries about upward pressure on labour costs, our latest forecast indicated that the inflation target would have been met by the end of this year without this further turn of the screw,'' she added.

Dr Ian Peters, deputy general secretary of the British Chambers of Commerce, said: ''The manufacturing sector is already in recession and with clear evidence of a slowdown in service sector growth we believe this is a rate rise too far.''

Lex Gold, director of the Scottish Chambers of Commerce, accused the Bank of an academic approach to the ''modest threat of inflation'' which leaves it ''tackling last year's problem. They seem wholly unaware, or unconcerned, of the potential damage being inflicted on our manufacturing base.''

Ian Duff, economist at the Scottish Council (Development and Industry), said: ''The decision to increase interest rates is most unwelcome. The continuing strength of the pound and the burden that this is causing to Scottish industry suggests that a reduction in interest rates would have been more appropriate, especially for the Scottish economy.''

The Bank said evidence had emerged over the past month that the ''cumulative tightening of the labour market has resulted in a rate of private sector earnings growth that jeopardises achievement of the inflation target over the medium run.

''Moreover the sterling exchange rate has remained about 3% lower than in the central projection of the May inflation report,'' it added.

The Bank went on: ''While there are increased uncertainties in the external environment, inflationary pressures appear greater than in the May projection, and the need for a slowdown in domestic demand growth has become more pressing.''

This week's meeting of the monetary policy committee was the first to be attended by the full complement of nine members. There was speculation in the City that the Bank's new chief executive, John Vickers, had joined the hawks in voting for the increase and that Charles Goodhart, one of the independent members, had switched back to the hawks.