Borrowers were hit with another increase in costs today as the Bank of England lifted the interest rate by 50 basis points from 3.5% to 4%.

It is the tenth consecutive monthly increase, taking rates to their highest since 2008 and will add £50 to the average borrower’s monthly mortgage payments. 

However, there were optimistic pointers in the Monetary Policy Report which reveals that the Bank now expects a shorter and shallower recession. This represents a climbdown by governor Andrew Bailey who last year warned of a long and deep recession.

The Bank’s monetary policy committee voted 7-2 in favour of the rise, with two members voting in favour of keeping rates at 3.5%.

Jeremy Batstone-Carr, European strategist at Raymond James Investment Services said the latest prediction is “a far cry from the rather dire predictions of only a few weeks ago.” 

He added: “The markets are eager for the Bank to signal it is close to, or at, its peak rate. When the Bank does signal that its rate-rising work is done, it will likely do so couched in flexibility, as the Bank of Canada has done so.

“There is a distinct feeling of senior officials copying each others’ homework, with 4 of the 5 central banks in G7 countries standing to behave similarly: rapid rate rises, then announcing a pause.

“Yet this may be premature given the economy’s surprising strength, the still-high core inflation, and continued strong wage growth. The Bank still has its work cut out to turn off the inflationary taps. 

Chancellor Jeremy Hunt described inflation as a “stealth tax” and repeated the government’s pledge not to add to the burden on public finances buy cutting taxes.

He said: “Inflation is a stealth tax that is the biggest threat to living standards in a generation, so we support the Bank’s action today so we succeed in halving inflation this year.

“We will play our part by making sure government decisions are in lockstep with the Bank’s approach, including by resisting the urge right now to fund additional spending or tax cuts through borrowing, which will only add fuel to the inflation fire and prolong the pain for everyone.”

Anna Leach, Deputy Chief Economist at the CBI, said: “The Bank’s decision this month shows that it is still too soon to call an end to peak interest rates. 

“While inflation is coming down thanks to lower energy prices, labour market shortages and broader inflationary pressures mean higher rates are still needed to bring inflation back to the 2pc target. 

“Rising interest rates, high inflation and tightening fiscal policy will challenge economic growth this year. The government needs to act decisively in the forthcoming Budget to reinforce the UK’s position as a global centre for innovation and the low carbon economy.”

Krishnapriya Banerjee, a managing director in Accenture’s UK banking practice, said: “The MPC was today faced once again with the challenge of simultaneously trying to curb rising inflation, while avoiding causing further personal financial distress to mortgage customers.

“After years of low interest rates, ten successive rises coupled with a cost-of-living crisis is forcing banks to fundamentally change tack in 2023 to better support customers. Mortgage approvals have fallen to COVID-19 lockdown levels, making it a less stable source of income for lenders. 

“With switching rates at an all-time high, banks will have to work harder to retain and attract customers, including through generous savings products and tools to helps retail customers manage their money.”

Mohsin Rashid, CEO of Zipzero, said: “Many had hoped the IMF’s sobering analysis earlier this week, revealing that the UK is to be the only major economy to shrink in 2023, would inspire the Bank of England to hit the brakes.

“Instead, the MPC’s latest increase marks the tenth in a row since 2021 and a devastating blow to British consumers and businesses.”

The UK is not alone in raising rates. The Federal Reserve in the US raised its rates again yesterday, taking its benchmark rate to a range of 4.5%-4.75% – the highest since 2007.

While Wednesday’s increase was not as big as some seen last year, the bank’s chairman, Jerome Powell, warned there could be more rate rises on the way, saying: “The job is not yet done.”

Interest rates in the eurozone have also been increasing, and the European Central Bank, which sets rates for the 20-nation bloc, is expected to lift them again later today.

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