The decision was split five-four between the committee, with the minority voting to increase the rate further to 0.75 per cent. Members Jonathan Haskel, Catherine Mann, Michael Saunders and Dave Ramsden voted to raise the rate.
The MPC said the decision was made to help inflation return to its two per cent target after it surged to 5.4 per cent in December, its highest level for nearly 30 years.
The committee said higher energy and goods prices were pushing inflation up, and predicted it would hit seven per cent in Spring before falling over the year.
“We expect inflation to fall back from the middle of this year. We don’t expect that energy prices will continue to rise as fast, and the shortages that are currently making it difficult for businesses to make their products should ease. We expect inflation to be close to our target in around two years’ time,” the committee said.
Last week, economists speculated that the base rate would rise to 0.5 per cent at the February meeting and predicted there would be three more increases this year before reaching 1.25 per cent.
MPC’s announcement added: “We have raised the official interest rate we set, known as Bank Rate, to 0.5 per cent to support inflation returning to our two per cent target.
“We may need to raise interest rates somewhat further. Our job is to ensure that inflation returns to our target in a sustainable way.”
GDP recovery
The committee said the Omicron variant had suppressed economic activity but this was expected to recover in February and March. Beyond that, GDP growth is expected to slow to subdued rates, the announcement read as higher living costs impact income and spending.
Market predictions confirmed
Henry Knight, managing director of mortgage broker Springtide Capital, said: “With the Bank of England having increased the interest rate twice within a short period of time already, it remains to be seen if another raise is likely to happen later this year. Some economists predict interest rate to reach up to 1.25 per cent by next year, which, compared to the current rate of 0.5 per cent, would have a much more significant effect on buyers.
“Until then, with the majority of homeowners being on fixed long-term mortgage rates, we don’t expect the latest increase to cause any major impact on the market.”
Joshua Elash, director of property lender MT Finance, said the rate rise was “an absolute necessity as a first step towards calming inflation” and it had already started to impact the wider economy.
Miranda Khadr, founder and chief executive at Pitch 4 Finance, held different sentiments saying it was “irresponsible for the Monetary Policy Committee to raise the base rate this month, despite the rise in inflation”.
She added: “The cost of essential day-to-day to living requirements such as food, gas and electricity, have been going up and more people are struggling to get by. There are too many things happening at once for rates to go up now. If you add in tax hikes that are due soon and higher interest rates people’s finances will suffer even more.”
“Not everyone is shielded by a fixed rate, especially those with commercial mortgages. SME property developers have had to deal with rising costs of materials and labour so adding in higher mortgage payments will be a blow to them. It will lead to higher house prices and push more first-time buyers and upsizers out of the market.”
