Members of the Monetary Policy Committee (MPC) voted by a majority of 6-3 to increase the base rate from 1% to 1.25%. The minority members wanted to increase the bank rate by 0.5% to 1.5%.

The rate hike was widely expected, and comes as the Bank aims to curb soaring inflation amid the pandemic, decline in GDP, the cost-of-living crisis and the global effects of Russia’s invasion of Ukraine.

The bank rate was last higher in January 2009 at 1.5%, before falling to 1% in February and then 0.5% in March 2009.

Base rate rises are one of the mechanisms the Bank of England uses to try and keep inflation under control (9% in April 2022), as higher borrowing costs generally mean people spend less.

This is now the fifth consecutive increase from the historic low rate of 0.1% in December 2021. It rose to 0.25% before climbing to 0.5% in February, 0.75% in March 2022 and to 1% last month.

The MPC previously forecast inflation to breach 10% by the year end, but it has revised this figure to “slightly above 11% in October”, reflecting the higher energy price cap set by Ofgem which estimated bills will rise to £2,800.

It added that while the government’s £15bn cost of living support package would likely boost GDP by around 0.3%, it would also raise inflation by 0.1 percentage points in the first year.

Minutes of the meeting held last night, published today, read: “The economy has recently been subject to a succession of very large shocks. Monetary policy will ensure that, as the adjustment to these shocks occurs, CPI inflation will return to the 2% target sustainably in the medium term, while minimising undesirable volatility in output.

“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, to 1.25%, at this meeting.”

‘Good cop, bad cop’

Laith Khalaf, head of investment analysis, AJ Bell, said: “The Treasury and the Bank of England are effectively playing the role of good cop, bad cop with UK consumers. On the one hand, the chancellor is giving away billions of pounds in helicopter money to help ease the cost-of-living crisis, while at the same time the Bank of England is cranking up the pressure on household finances by increasing borrowing costs.

“Consumers probably won’t be best pleased to find that some of the fiscal giveaways they have been handed by the chancellor are going to be gobbled up by higher interest rates. But if the Bank had failed to take any action, the pound would have come under further pressure, which adds to the cost-of-living crisis by pushing up the price of commodities priced in dollars, especially fuel. It would also increase the chance that inflation becomes embedded in the system and lasts for longer.

“Ultimately, the risk is that the combination of the energy price shock and rising interest rates leaves the UK in recession, having only just climbed back to pre-pandemic levels of economic activity.”

What the base rate rise means for your monthly bills

Mortgage borrowers

If you’re on a fixed rate mortgage, there won’t be any change until you come to the end of your deal. Around three quarters of UK homeowners have a fixed rate deal.

But if you’re one of the two-million borrowers on variable rate mortgages (1.1 million on standard variable rates, 850,000 with a tracker), you can expect the rise to be passed on fairly soon. Those remortgaging will also see higher rates trickle through.

Rachel Springall, finance expert at data site Moneyfacts, said the average standard variable rate is currently 4.91%.

She said: “Switching from a SVR to a fixed rate could significantly reduce someone’s mortgage repayment. The difference between the average two-year fixed mortgage rate and SVR stands at 1.66%, and the cost savings to switch from 4.91% to 3.25% is a difference of approximately £4,418 over two years (based on £200k mortgage over 25-year repayment basis).

“A rise of 0.25% on the current SVR of 4.91% would add approximately £700 onto total repayments over two years.”

According to the Bank of England and the Financial Conduct Authority, the outstanding value of all residential mortgage loans was £1,630.5bn at the end of Q1 2022. 

Loan and credit card borrowers

A higher base rate is also likely to impact interest rates on loans and credit cards, making it more expensive to borrow money or pay off debt.

However, for those with a fixed rate personal loan, there’s no change as it’s set for the term of the loan.

But, it may become harder to be accepted for a loan as banks could become stricter on affordability, particularly around a borrower’s ability to continue making higher repayments.

Savings rates

Lenders are fast to pass on mortgage rate hikes, but when it comes to savings, providers aren’t quick off the mark to share the benefit.

In theory, an increase in the base rate is good news for savers, but not all providers will pass on the full 0.25% rate rise.

Further, as inflation comes in at 9% – a 40-year high, it also means there are no standard savings accounts that beat or match inflation so money is losing its worth in real terms.

Sarah Pennells, consumer finance specialist at Royal London, said: “While rising interest rates are generally a win for savers, our research shows that almost a third of people were planning to reduce the amount they were saving, while a fifth would stop altogether, as a result of the cost-of-living crisis. For those who can save, the gap between interest rates and inflation, now at 9%, means savers are continuing to lose value on cash they have in the bank.

“Following a rise in base rates, banks and building societies don’t necessarily raise interest rates on all their savings products and may not increase them by the same amount, so it’s worth waiting a few weeks before checking comparison websites and best-buy tables to see if you can get a better interest rate.”