The base rate rises another 0.5 percentage points to 2.25% – the highest in 14 years – and adds to the burden on mortgage payers already struggling with the soaring cost of living.
For an average UK property costing £270,708 with a loan-to-value ratio of 75%, the rise means monthly mortgage payments will rise by around £52.
The Bank also admitted that the country is almost certainly in recession. The decision is the seventh consecutive increase and takes the rate to its highest level since 2008.
However, policy makers on the monetary policy committee fell short of the 0.75 percentage point hike that many economists were expecting.
The MPC minutes said it was because the Government’s huge step to freeze typical household energy bills at £2,500 for two years – costing £150billion – would limit the spike in inflation , currently at 9.8%.
Charlie Huggins, head of equities at investment specialists Wealth Club, said: “A second 0.5 percentage point hike in the base rate in seven weeks will put further pressure on consumers and businesses, at a when many are already strangled by the cost-crisis of life.
“The MPC will feel its hand has been forced with the Bank of England stuck between a rock and a hard place. A softer approach to rising rates risks sending the pound plummeting and inflation spiraling even further out of control.
“But excessive tightening could easily stifle the life of the economy, without significantly easing the cost-of-living crisis. It’s a horrific balancing act, with seemingly no good results.
David Beard, personal finance specialist at Lending Expert, said: “For average working families, the thought of increased mortgage repayments is a blow to already overstretched budgets.
“This rise in interest rates is adding pressure on households at a time when consumers are desperately trying to figure out how they will afford rising food prices, rising energy bills and a full tank of fuel. “
According to trade group UK Finance, homeowners on tracker mortgages that follow the base rate will immediately be hit with more expensive payments which will typically cost them £600 a year.
Those who fixed their payments two or three years ago when interest rates were at their lowest – around 1.8 million homeowners – will find much higher rates offered by lenders when they come to renegotiate, a they say.
Ashley Thomas, director of Magni Finance, said: ‘It’s no shock that rates have risen and mortgage borrowers will see an increase in their costs when they look to renew. I have a client who is nearing the end of their fixed rate at 1.19%, and the lowest rate is now 4% for a two-year fixed rate. It’s a huge increase. »
MPC members were divided into three sides over how best to curb the skyrocketing rate of inflation, committee minutes showed.
Bank of England Governor Andrew Bailey and four colleagues voted for the half-point increase, while three members wanted a bigger increase and another backed a 0.25 point increase. percentage.
The move, coupled with the sale of an £840bn stockpile of government bonds, will make borrowing more expensive for Chancellor Kwasi Kwarteng.
And it comes as he prepares to announce a multibillion-pound package of tax cuts in his mini budget today.
This should change the economy in a ‘material’ way by boosting growth, but will also add billions of pounds to government borrowing.
The interest bill on Britain’s £2.4trillion debt mountain hit £8.2tn last month, the highest figure for August since records began in 1997, according to the ‘Office for National Statistics.
Earlier this week, Prime Minister Liz Truss announced the Energy Bill Relief Program for businesses struggling under soaring gas and electricity bills. And yesterday Mr Kwarteng confirmed that the 1.25% National Insurance hike will be reversed on November 6 and its replacement – the Health and Social Care Tax, due on April 23 – will be canceled.
Official data shows the economy shrank 0.1% in the three months to June.
Banking policymakers now believe the economy continued to contract by 0.1% in the quarter to September, which would plunge the UK into the mildest of technical recessions – defined as two consecutive quarters of economic decline.
However, the rise in the base rate will once again be welcomed by savers. According to Moneyfacts, average savings rates are at their highest level in almost 10 years.
Someone with a nest egg of £20,000 would get an extra £100 a year if the 0.5 percentage point rise was passed on to them, it was said.