Members of the Monetary Policy Committee (MPC) voted by a majority of 6-3 to increase the base rate from 0.75% to 1%. The minority members wanted to increase the bank rate by 0.5% to 1.25%.

The rate hike was widely predicted, and comes as the Bank aims to curb soaring inflation amid the ongoing pandemic, the cost-of-living crisis and the global effects of the Ukraine Russia war.

This takes the bank rate to its highest level in 13 years (February 2009). In January 2009 the rate was 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 (7% in March 2022), as higher borrowing costs generally mean people spend less.

This is now the fourth 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 and then 0.75% in March 2022.

But the base rate could rise even further. In March, revised forecasts suggested it could reach 2% by the end of the year. But last week the chancellor, Rishi Sunak, told the cabinet that interest rates could reach 2.5% over the next 12 months, adding that financial markets had already priced the increase in.

And following the latest MPC meeting, it also projects that the rate will peak at 2.6% in 2023 before falling back to 2% in three years’ time

However, leading economic consultancy firm Capital Economics, revised its forecast and said with inflation staying higher for longer and with the labour market remaining tight into 2023, it suggested the Bank will raise the base rate to 3% next year.

Indeed, inflation was expected to increase to around 8% in Q2 2022 (four times the 2% target) and “perhaps even higher later this year”, according to economic consensus.

But the MPC now expects inflation to rise further over the remainder of the year, to just over 9% in Q2 2022, and averaging slightly over 10% at its peak in Q4 2022. This would take inflation to a 40-year high, last seen in 1982.

Minutes of the meeting read: “The majority of that further increase reflects higher household energy prices following the large rise in the Ofgem price cap in April and projected additional large increase in October. The price cap mechanism means that it takes some time for increases in wholesale gas and electricity prices, and their respective futures curves, to be reflected in retail energy prices. Given the operation of the price cap, consumer price inflation is likely to peak later in the UK than in many other economies, and may therefore fall back later. The expected rise in CPI inflation also reflects higher food, core goods and services prices.”

Turning to GDP, the Bank said growth is expected to slow sharply, reflecting the impact of sharp rises in global energy and tradeable goods prices on most UK households’ real incomes.

While the unemployment rate is likely to fall slightly further in the near term, it is expected to rise to 5.5% in three years’ time given the sharp slowdown in demand growth, the MPC stated. It fell to 3.8% in the three months to February 2022.

What the base rate rise means for you

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. According to Adrian Anderson, director of  Anderson Harris, around 74% of UK homeowners have a fixed rate deal. But if you’re one of the two-million borrowers on variable rate mortgages (1.1m 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.

Sarah Pennells, Consumer Finance Specialist at Royal London, said for every quarter per cent rise in mortgage rates costs someone with a £200,000 25-year repayment mortgage an extra £27 a month. “While some homeowners will be able to afford that, others will undoubtedly struggle, especially as other costs spiral.”

Data from Moneyfacts revealed that average standard variable rates have already climbed from 4.41% in November 2021, to 4.71% in April and 4.78% in May 2022.

Meanwhile the average rates offered on two-year fixed deals have also been rising, from 2.29% in November 2021, to 2.86% in April, and now stand at 3.03%.

The gap between two and five-year fixes is also smaller than in previous years, with the longer term averaging 3.17%.

Laura Suter, head of personal finance at AJ Bell, said: “The Bank now expects rates to rise to 2.5% by next year, which will lump more costs on mortgage holders. Including today’s increase, that would add an extra £4,452 a year onto the mortgage costs of someone with a £400,000 mortgage, or £2,784 a year onto the mortgage bill of someone with £250,000 of borrowing.”

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown suggests that for those with six months or less left on a current mortgage deal, they should apply for a remortgage rate today, and lock in a deal in case rates rise again.

“If you have longer until your fix comes to an end, there’s time to plan for how you’ll cover the extra costs,” she added.

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 pass on 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.

Research by data site Moneyfacts this week revealed that despite there being three base rate hikes this year already, 83% of easy access accounts paid less than the previous 0.75% Bank of England base rate (based on a £10,000 sum).

Plus, with inflation at a 30-year high, and with it expected to breach 8% soon, it will become harder for savers to match or beat inflation so money is losing its worth in real terms.

But the data site revealed average easy access rates are on the rise, from 0.33% in April to 0.39% in May (based on £10,000 sum).

Suter, said: “Someone with £10,000 of savings, which is currently earning 0.01% interest, could make £149 by switching to the top rate easy-access account – not bad for 10 minutes work. And if someone had £30,000 of savings they’d be rewarded with £447 of extra interest for that few minutes of work to switch accounts.”

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.

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

Coles, said: “Bank of England showed record spending on credit cards in February, and another £800m loaded onto plastic in March. Meanwhile, the Money Advice Trust found that one in four people have used credit cards to pay bills or for essentials in the past three months. And ONS data today showed that card spending on staples was a quarter higher than pre-pandemic levels.

“Those with debts should shop around and check if they can get a more competitive deal. Before you apply for a cheap deal, it’s worth using the Moneysavingexpert credit card eligibility tool, which will give you an idea of whether you will qualify, without doing a full credit check that shows up on your credit record. However, we all need to think carefully before we spend anything on our cards. It can feel like a handy emergency solution to rising prices in the short-term, but once you have debts to repay and interest building up, it quickly becomes yet another part of the problem.”