THE BANK of England bathed in a syrup of warm acclaim from industry yesterday after its decision to keep interest rates unchanged at 5 per cent, their lowest level for 22 years. But it will not be many months before it has to increase the cost of loans and take a basting in righteous indignation. Interest rates will have to rise by a quarter- or half-point before Christmas, even though inflation is likely to decline throughout the autumn.

Northern manufacturers claim that the Monetary Policy Committee sets interest rates to suit the South. They argue that it should pay more attention to factory output on Humberside than to house prices in Hampstead. It is true that Britain is still a boom-and-bust economy, with the boom in the South and the bust in the North. But it will take a lot more than tinkering with interest rates to heal this long-standing structural divide. Even if manufacturing is still struggling to recover, the Bank will have to start lightly applying the monetary brakes in a month or so.

The justification for this can be found in today's low inflation figures - headline retail price inflation is just 1.3 per cent, thanks to the Bank's prompt action in raising interest rates throughout 1997 and the first half of 1998. The need to act soon for the sake of keeping inflation low in 2001 is demonstrated by those South-eastern house price rises, precisely because the most congested parts of the housing market have always provided one of the earliest warning signals of potential inflationary pressure. Let a bit of steam out early, and it need never build up to the point where more drastic action is needed. This explains why interest rates did not have to climb higher than 7.5 per cent last year, only half their peak in the previous cycle, and why they could be cut so swiftly to their present level when the economy started responding.

So Southern home-buyers with their big mortgages and northern manufacturers alike must brace themselves stoically for higher interest payments in the months ahead. And Eddie George will probably want to steer clear of Newcastle until the next time the Bank can start thinking about cutting rather than raising rates.