Widely predicted, this is now the sixth consecutive increase from the historic low rate of 0.1 per cent in December 2021.
The bank rate was last higher in December 2008 where it stood at two per cent, before falling to 1.5 per cent in January 2009. The last time the BoE increased the rate by 0.5 per cent was 27 years ago when it was hiked from 6.13 per cent in December 1994 to 6.63 per cent in February 1995.
Members of the Monetary Policy Committee (MPC) voted by a majority of 8-1 to increase the base rate from 1.25 per cent to 1.75 per cent. Silvana Tenreyro wanted to increase the bank rate by a smaller 0.25 per cent to 1.5 per cent.
The bank said for the majority, “a more forceful policy action was justified”. It added: “Against the backdrop of another jump in energy prices, there had been indications that inflationary pressures were becoming more persistent and broadening to more domestically driven sectors.
“Overall, a faster pace of policy tightening at this meeting would help to bring inflation back to the two per cent target sustainably in the medium term, and to reduce the risks of a more extended and costly tightening cycle later.”
Tenreyro, who voted for a smaller rise of 0.25 per cent, suggested existing policy might already have reached the level consistent with returning inflation to the two per cent target in the medium-term.
Minutes of the meeting held last night, but published today, read: “The United Kingdom is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.”
It said domestic inflationary pressures would remain in the first half of this forecast period and dissipate over time.
“Global commodity prices are assumed to rise no further, and tradable goods price inflation is expected to fall back, the first signs of which may already be evident. Although the labour market may loosen only slowly in response to falling demand, unemployment is expected to rise from 2023.
“Domestic inflationary pressures are therefore expected to subside in the second half of the forecast period, as the increasing degree of economic slack and lower headline inflation reduce the pressure on wage growth,” the MPC said.
It said the economy had suffered a series of shocks but monetary policy would ensure inflation would sustainably return to target in the medium-term.
Inflation to reach 13 per cent
Today’s rate rise comes as the BoE aims to curb soaring inflation which came in at 9.4 per cent in June, amid the backdrop of an economic slowdown, the cost-of-living crisis, and the global effects of the Russia Ukraine war.
Base rate rises are one of the mechanisms the BoE uses to try and keep inflation under control as higher borrowing costs generally mean people spend less.
But as the cost of living soars and inflation rises, workers are striking for higher pay to compensate, which could ultimately lead to a wage inflation spiral.
The MPC previously forecast inflation to breach 10 per cent by the year end, but it revised this figure to “slightly above 11 per cent in October”, reflecting the higher energy price cap set by Ofgem.
According to leading energy consultancy, Cornwall Insight, the energy price cap for Q4 2022 is now forecast to reach £3,359.
It now predicts inflation will now rise to just over 13 per cent by the end of the year, three percentage points higher than its May projection and two percentage points up on June’s expectation.
It said this would “remain at very elevated levels throughout much of 2023, before falling to the two per cent target two years ahead”.
Impact on mortgages
The bank recognised that lending rates for new fixed rate mortgages had risen and the passing through of rates to risk-free mortgages was close to what was seen during the 2008 global financial crisis.
It said its recent Credit Conditions Survey indicated the availability of secured credit for households fell in Q2, reflecting a worsening economic outlook. Lenders expect credit availability to fall further in Q3.