Bank of England raises interest rates to 0.25%

The Bank of England has raised interest rates for the first time in more than three years, in response to calls to tackle surging price rises.

The increase to 0.25% from 0.1% came despite fears that the Omicron variant of Covid could slow the UK economy by causing people to spend less.

The Bank's Monetary Policy Committee (MPC) voted 8-1 in favour of the increase.

Rates had been at 0.1%, a record low, since March last year, when they were cut in response to the effects of the coronavirus pandemic. It was the second month in a row that Bank policymakers had surprised the markets.

Economists had expected a rate rise at the MPC's last meeting in November, but policymakers voted to hold fire. This time, analysts expected a further delay because of Omicron, but the committee thought differently.

The cost of living rose by 5.1% in the year to November, latest figures show. That was the highest rate since September 2011 and well above the Bank's 2% inflation target.

However, one business group said the rate rise would do little to stop prices going up, since costs were being pushed higher by global factors largely outside the Bank's control.

What does this mean for borrowers and savers?

The decision by the Bank of England will add just over £15 to the typical monthly repayment for a tracker mortgage customer.

A standard variable rate mortgage-holder is likely to pay nearly £10 extra a month.

Nearly two million people in the UK have one of these two types of mortgages.

While savers may welcome news of higher rates, analysts warn there is no guarantee the higher Bank rate will lead to better returns on savings.

Even if savings rates increase slightly, returns are still well below the rate of inflation.

“The committee continues to judge that there are two-sided risks around the inflation outlook in the medium term, but that some modest tightening of monetary policy over the forecast period is likely to be necessary to meet the 2 per cent inflation target sustainably,” the BoE said.

"The Bank of England's decision to raise interest rates was surprising, given mounting uncertainty over the economic impact of the Omicron variant," said Suren Thiru, head of economics at the British Chambers of Commerce.

He added that the current inflationary spike was mostly driven by global factors, so higher interest rates would do little to curb further increases in inflation.