The Bank of England has raised its interest base rate to the highest point since the start of 2009, as the cost of living continues to soar.
The Monetary Policy Committee (MPC) set the rate at 1.25% – up from 1% previously – and the fifth increase in a row as it tries to tame runaway inflation.
It also warned that prices for households across the country might increase even further than previously thought.
Three of the nine-person MPC voted for an even bigger hike, arguing that rates should rise as high as 1.5%.
“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%, 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% in April when the energy price cap was hiked.
But things are set to get even worse later this year.
Experts currently expect that regulator Ofgem could put up energy prices even further, from £1,971 per year to around £2,800.
This, alongside other pressures in the economy, could lead to CPI topping 11% in October, the bank said.
Just a month ago it had predicted inflation to peak at above 10%.
“The economy has recently been subject to a succession of very large shocks,” Bank of England governor Andrew Bailey wrote in a letter to Chancellor Rishi Sunak, setting out why inflation was so much higher than the 2% target.
“These shocks have pushed global energy and tradable goods prices to elevated levels.
“Those price increases have raised inflation and, since the UK is a net importer of these items, will necessarily weigh on most UK households’ real incomes and many UK companies’ real profits.”
The chancellor has announced multi-billion pound help for struggling households, much of which is set to come in when energy bills rise again in October.
But it might prove somewhat of a double-edged sword, the bank said, adding another 0.1 percentage points to CPI in the first year.
In its reports on Thursday, the bank also downgraded its forecast for gross domestic product (GDP) for the second quarter of the year.
GDP is now expected to drop by 0.3% across the quarter, weaker than anticipated just over a month ago.
The bank’s base rate has been low since being cut rapidly during the financial crisis. It has risen recently in response to what is happening in the economy.
It is the first since records began in 1694 that the base rate has been set at 1.25%.
Kevin Brown, communications manager at Scottish Friendly, commented: “Although the central bank finds itself in a difficult position with factors at play that are outside of its control, we cannot forget that consumers are stuck between a rock and a hard place.
“Living costs continue to rise and could spike sharply again in October when the new energy price cap comes into effect, and with interest rates going up many UK households are also facing higher borrowing costs.
“Savers should benefit from rising interest rates, but in a cost-of-living crisis many households will be more concerned with their bills going up, rather than the possibility of earning a few extra pounds on their savings.”
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