The Bank of England has raised interest rates to 1%, marking the highest rate in 13 years and the fourth rise in a row.
The Bank's monetary policy committee (MPC) voted 6-3 to increase the base rate by 0.25 percentage points from 0.75% on 5 May 2022.
The current rate of inflation as measured by the consumer prices index (7%) is creating an intense cost of living crisis, with rising electricity and gas prices putting a particular strain on businesses and households.
The Bank said it expects inflation to rise further over the remainder of the year, to just over 9% in Q2 2022 and to 10.25% in Q4 2022 before gradually falling back to its target of 2% in 2024.
"Global inflationary pressures have intensified sharply following Russia's invasion of Ukraine. This has led to a material deterioration in the outlook for world and UK growth," the Bank said.
Experts welcome increase
The UK base rate of interest is the money individuals and businesses pay for borrowing money and what banks will pay to people saving with them, and is often seen as the Bank of England's main tool to stave off inflation.
Kitty Ussher, chief economist of the Institute of Directors (IoD), welcomed the Bank's "judgement that the need to tackle high expectations of inflation is of greater concern than the risk of burning demand too fast in the short-term".
Martin Mctague, chair of the Federation of Small Businesses, said:
"The hope is that today's move goes some way to putting the brakes on input price inflation in a way that hasn't been achieved by previous rate rises, mitigating the pain of higher debt repayments."
Julian Jessop of the Institute of Economic Affairs (IEA), on the other hand, said the rise did not go far enough, describing it as the "bare minimum" to tackle inflation, with the IEA's so-called shadow MPC voting to increase rates to 1.5%.
Increasing the risk of recession?
However, not everyone seemed enthralled with the increase.
Suren Thiru, head of economics at the British Chambers of Commerce said the Bank's decision will cause "considerable alarm", adding:
"Higher interest rates will do little to address the global headwinds and supply constraints driving this inflationary surge. It also raises the risk of recession by damaging confidence and intensifying the financial squeeze on businesses and consumers."
Professor Richard Murphy of Tax Research UK, made a similar comment:
"The only reason why the Bank of England should increase interest rates is to stop an economy overheating, which creates inflation.
"The UK economy is in its worst state since 2008, at least. We need rate cuts in that case, not interest rate rises."
WIll interest rates go up again?
The most recent rate increase was the fourth in a row, with the Bank having first raised them from 0.1% - the lowest rate in history - in December 2021.
It seems the Bank does not plan on stopping, with its own inflation projections based on an assumption the bank rate would be increased to 2.5% by mid-2023.
However, as Ussher of the IoD said:
"If cost of living pressures cause households to rein back on discretionary spending, or further difficulties in our export markets cause British companies to suffer lower orders, the Bank's assumption may need to be revised."
The MPC is set to publish its next report in June 2022.
Talk to us about your cost of living.