The increase comes as the bank attempts to temper rising inflation and poor economic growth.
The Bank’s monetary policy committee made the decision to increase the base rate of interest for the fifth time in a row on Thursday afternoon, its highest point in 13 years.
This is the first time interest has been above 1 per cent since January 2009 and comes as the Federal Reserve raised interest by the highest margin since 1994 intensifying its drive to tame high inflation.
“In view of continuing signs of robust cost and price pressures, including the current tightness of the labour market, and the risk that those pressures become more persistent, the committee voted to increase Bank rate by 0.25 percentage points,” the committee said in a notice.
Thank you for following our coverage of today’s interest rate announcement, we’re now ending our live blog. For the full story on the hikes, the impact and reaction from economists, head over read the full story here.
Economy to contract by 0.3 per cent in Q2
The Bank of England said it expects the UK economy to shrink by 0.3 per cent in the second quarter.
In a note following the interest rate announcement the Bank said: “Bank staff now expect GDP to fall by 0.3 per cent in the second quarter as a whole, weaker than anticipated at the time of the May Report.
“Consumer confidence has fallen further, but other indicators of household spending appear to have held up. Some indicators of business sentiment have weakened, although they have so far remained more resilient than indicators of consumer confidence and consistent with positive underlying GDP growth.”
Small businesses to face brunt of interest rate hike, BCC warns
The British Chambers of Commerce (BCC) cautioned over the impact of the rate rise on businesses.
David Bharier, head of research at the BCC, said: “While expected, the decision to raise the interest rate will add further concern to businesses amid a weakened economic outlook, soaring cost pressures, and labour shortages.
“The increase signals the Bank's intention to tackle inflation but businesses have been raising the alarm about spiralling prices since the start of 2021 and a higher interest rate is unlikely to address many of the global causes of this.
“The increase could impact smaller businesses who may be reliant on banking or overdraft facilities, for instance, those buying goods in bulk in an attempt to offset raw material shortages.”
How did the Bank of England vote on hiking interest rates?
The Bank of England's monetary policy committee (MPC) of nine members voted six to three to increase rates to 1.25 per cent.
The central bank said governor Andrew Bailey, Ben Broadbent, Jon Cunliffe, Huw Pill, Dave Ramsden and Silvana Tenreyro backed a quarter point rise, but that three members, Jonathan Haskel, Catherine Mann and Michael Saunders, voted for a larger increase, to 1.5 per cent.
High cash savers could benefit from interest rate hike, experts say
Some experts have reacted with the positive side of the interest rate increase highlighting that those with cash savings could reap the benefits of higher interest.
Martin Lawrence, director of investments at Wesleyan, a specialist financial services firm, said: “Faced with runaway inflation, the Bank of England was under immense pressure to act urgently, so today’s announcement is no real surprise. We expect further interest rates rises tipping towards three percent in the months ahead; however, the MPC’s hands are partially tied in that they can’t raise rates too high or too quickly, or else risk smothering the UK economy.
“Higher interest rates can be good news for those with cash savings, but only when providers pass on the base rate to their customers. For those who are fortunate enough to have money in savings, they should be considering all options to maximise their financial returns, such as investing in Stocks & Shares ISAs and other products that look past short-term volatility with the aim of long-term gains.”
‘We will act forcefully if necessary,’ BoE says
The Bank of England says it will act forcefully if necessary to tackle inflationary pressures.
“The Monetary Policy Committee (MPC) will take the actions necessary to return inflation to the 2 per cent target sustainably in the medium term, in line with its remit. The scale, pace and timing of any further increases in Bank Rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures.
“The Committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response.
Things could worsen BoE warns as inflation expected to soar to 11 per cent in October
The Bank of England has warned that inflation could soar to 11 per cent by October.
It also warned that prices for households across the country might increase even further than previously thought. Three of the nine-person Monetary Policy Committee (MPC) voted for an even bigger hike, arguing that rates should rise as high as 1.5 per cent.
“In view of continuing signs of robust cost and price pressures, including the current tightness of the labour market, and the risk that those pressures become more persistent, the committee voted to increase Bank rate by 0.25 percentage points,” it said in a notice.
For the MPC, which decides on rates, a key concern is inflation.
The committee is tasked with keeping inflation constant at around 2 per cent, a target it is currently well clear of.
The cost of living has been soaring for months, with consumer prices index (CPI) inflation hitting a 40-year high of 9 per cent in April when the energy price cap was hiked.
But things are set to get even worse later this year as experts currently expect that regulator Ofgem could put up energy prices even further, from £1,971 per year to around £2,800.
New homeowners particularly impacted by interest hike, experts warn
Experts reacting to the recent interest rate have said new home owners will be particularly impacted by the hike.
Richard Davies, managing director at estate agency chain Chestertons, says: “Anyone who has been following the news would have been likely to have expected the Bank of England’s decision to increase the bank rate. In anticipation, many house hunters were rushing to seal a deal on their property purchase last month and lock in a more favourable fixed rate.
He added: “We expect the new rate rise to impact particularly on new home owners whose mortgage loan to value is above 75%, those on a variable rate as well as property buyers in London, where the average mortgage value has surpassed £392,000. If we take that average and consider the recent rate increase, London homeowners could be facing an annual increase in mortgage payments of almost £600. A big addition to the already rising cost of living.”
BREAKING: The Bank of England increases interest rates to highest level in 13 years
The Bank of England has raised interest rates to 1.25 per cent from 1 per cent - the highest since January 2009.
Global shares hit by US interest rate hike
Global shares were mostly lower Thursday after the Federal Reserve raised its key interest rate by three-quarters of a point and signaled more rate hikes were coming to fight inflation.
European benchmarks and US futures slipped after Tokyo and some other markets tracked Wall Street's gains of the day before.
Shares in New York rallied after the Fed's hike, the biggest since 1994, as investors initially took heart from Chair Jerome Powell's comments suggesting future rate increases may be more modest.
But analysts warned the gains might be short-lived given the extent that high inflation has seeped into the world economy.
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