Bank committee members voted 8-1 for a hike

The Bank of England today defied expectations and raised interest rates for the first time in three years.

The rate setting monetary policy committee voted 8-1 in favour of lifting rates 15 basis points from a record low 0.1% to 0.25%.

It comes as inflation has soared to over half the Bank’s target, hitting 5.1%, the highest level in over 10 years.

Sterling rose 0.63% against the dollar at $1.3352. At 12.30pm the FTSE 100 was off its high for the day, but was still strongly higher at 7,245.81, up 75.06 points (1.05%).

Despite inflation rising strongly last month, analysts had expected the MPC to leave rates unchanged amid concern that the Omicron variant of Covid could slow the UK economy by causing people to spend less.

There are also other cost pressures in the economy, not least energy and the price of importing goods which are squeezing company balance sheets.

The committee said the Omicron variant “is likely to weigh on near-term activity” but judged that “its impact on medium-term inflationary pressures is unclear at this stage”.

It also voted unanimously to maintain the Bank’s asset purchase scheme at £875bn.

Suren Thiru, head of economics at the British Chambers of Commerce, said:  “The Bank of England’s decision to raise interest rates was surprising given mounting uncertainty over the economic impact of the Omicron variant.

“While today’s rate increase may have little effect on most firms, many will view this as the first step in a longer policy movement – not as a partial reversal of last year’s cut. 

“While policymakers are facing a tricky trade-off between surging inflation and a stalling recovery, with the current inflationary spike mostly driven by global factors, higher interest rates will do little to curb further increases in inflation.

“Instead, it is vital more than ever that the government’s Supply Chain Advisory Group and Industry Taskforce start to provide some practical solutions to the supply and labour shortages that are continuing to stoke inflationary pressures. 

“Without real improvement to the situation supply chains are currently facing rising prices are likely to continue to be an issue even with monetary policy responses.”

Alpesh Paleja, CBI lead economist, said: “The decision to raise interest rates signals that the MPC want to get off on the front foot in tackling rising inflation. We’re likely to see at least a couple more rate rises, as flagged in previous commentary from the Committee.

“However, the emergence of the Omicron variant has raised uncertainty over the near-term outlook, so the MPC will likely move more cautiously. We could even see a return to the Committee’s holding pattern on monetary policy, if there are strong signs of either the virus or Plan B restrictions dampening activity and price pressures.

“But in either scenario, it’s important to remember the overall stance of monetary policy will remain very accommodative going forward.”

The last time the Bank raised the interest rate was in August 2018, when it hit 0.75%, still low in historic terms.

The rate was cut twice in March 2020 at the start of the pandemic.

Building societies and banks raised their lending rates on mortgages last month ahead of what was expected to be a rate rise at the last MPC meeting.

However, the impact of changes in interest rate on home owners is much less than in previous eras as 74% of mortgage customers are now on a fixed rate product and will see no immediate change to their mortgage payments. Almost all mortgages (96%) mortgages advanced since 2019 have been on fixed rates.

For 850,000 mortgage borrowers who have a tracker rate mortgage, UK Finance estimates that a rise in the Bank Rate of 0.15 percentage points will lead to an average increase in repayments by £15.45 per month.

For those who are on a standard variable rate – approximately 1.1 million mortgage borrowers – this rise translates to an estimated average increase of £9.58 per month.

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