The Bank of England (BoE) has raised the bank rate from 1.25% to 1.75%, the sixth consecutive increase and the highest in 27 years.

The Bank's monetary policy committee (MPC) voted for the rise by an 8-1 majority in an attempt to bring inflation back to its 2% inflation, hoping it will help to sustain growth and employment.

In the report from the BoE's MPC, it said that inflation as measured by the consumer price index is expected to peak at a higher rate than forecasted to just over 13% in Q4 2022.

The MPC also expects inflation to remain at high levels throughout 2023 before falling to the targeted 2% in 2024.

Recently released figures from the Office for National Statistics reveal that inflation hit 10.1% in July 2022, the first double digit rate seen since 1982.

Andrew Bailey, governor of the BoE, said:

"The real risk we're responding to is that inflation becomes embedded, and it doesn't come down in the way that we would otherwise expect.

"We've had a domestic shock. We've had shrinkage in the labour force over the last two years or so."

Economic effects

The BoE warned the country is possibly heading into the most prolonged recession since the financial crisis.

The cost of living crisis is expected to become more challenging as a recession - defined as two-quarters of consecutive negative growth - is set to begin in the autumn and could last for more than a year.

Real household post-tax income is projected to fall sharply for the rest of 2022 and into 2023, while consumption growth is expected to shrink.

The BoE also stated that unemployment will rise in 2023, contributing to lower inflationary pressures.

The increase to the base rate of interest will make mortgages more expensive, particularly affecting homeowners who are looking to remortgage.

People with fixed-rate mortgages will not be immediately affected by the base rate, as they will continue to pay the same throughout the rest of their fixed term.

Industry reactions

Chairman of the Federation of Small Businesses, Martin McTague, expressed concern about the effect on businesses across the country.

"Many commercial, personal and professional loans that small businesses and sole traders hold are not protected by fixed rates and will move in line with the increase," he said.

"In a situation where inflation is already putting many small firms in extremely difficult conditions, there is now further concern that these businesses will face higher costs in paying back their loans."

Kitty Ussher, chief economist of the Institute of Directors, welcomed the decision:

"With energy prices continuing to rise, strong intervention is needed to increase confidence that we will soon be through the worst, so that boardroom decision-makers can plan ahead with greater certainty.

"We will be watching carefully to see if today's rate rise brings business expectations more into line with the Bank of England's central forecast that inflation will peak before the end of this year."

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