The Bank of England has raised the base interest rate by half a percentage point to 1.75 per cent, the biggest rise since 1995, in an attempt to combat runaway inflation.
The nine-strong monetary policy committee voted eight to one in favour of a 50 basis point rise, defying some market expectations for an increase by 25 basis points.
It is the Bank’s sixth consecutive tightening in monetary policy and follows in the footsteps of the US Federal Reserve and European Central Bank, which have begun aggressively raising rates by larger increments.
Interest rates are now the highest since 2009 as the Bank attempts to bring down inflation, which is running at a 40-year high of 9.4 per cent and is on course to exceed 11 per cent later this year.
These would be the worst inflation rates in the G7, caused in large part by rising global energy prices driving household bills higher this year. The UK economy is also heading for a slowdown this year as consumer incomes are squeezed more tightly than since the 1950s.
Andrew Bailey, the Bank’s governor, has hinted that it will also announce how it intends to begin unwinding the £850 billion of government debt pumped into the economy since the financial crisis, offloading bonds worth between £50 billion and £100 billion from as early as next month.
The Bank will also deliver its quarterly outlook, with Bailey expected to forecast that inflation will rise beyond 11 per cent and remain in double digits into next year. The Bank’s target is 2 per cent.
Commenting on today’s Bank of England interest rate rise, David Bharier, Head of Research at the British Chambers of Commerce (BCC), said: “This rise is the clearest signal yet of the Bank of England’s intention to get inflation under control. Spiralling prices are cited by businesses as by far and away the top concern right now.
“However, given the extremely precarious state of the economy, this decision is not without risk for businesses and consumers that are exposed to banking or overdraft facilities.
“There are many causes of the current inflation crisis – global supply chain problems, trade barriers, soaring energy costs, increased taxes, and labour market shortages. Interest rate rises alone will do little to address these.
“Worryingly, our research indicates strongly that most small businesses are not investing for growth, and that longer-term confidence is beginning to wane.