The Bank of England has raised the interest rate by 0.25% to 1%, marking the highest rate for 13 years

The rate has gone up by 0.25% from the current 0.75%, and is likely to continue to rise over the next 12 months. The Bank expects the base rate to increase to 2.5% by mid 2023, falling to 2% at the end of 2024.

The current 7% rate of inflation is creating an intensifying cost of living crisis with soaring electricity and gas prices. CPI inflation is expected to rise further over the remainder of the year, to just over 9% in 2022 Q2 and averaging slightly over 10% at its peak in 2022 Q4. However, the Bank then expects inflation to drop back to 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.

These developments have exacerbated the combination of adverse supply shocks that the UK and other countries continue to face. Concerns about further supply chain disruption have also risen, both due to Russia’s invasion of Ukraine and to Covid-19 developments in China.

Martin Beck, chief economic adviser, EY Item Club said: ‘There is a bit of difference of view in our forecast and what banks are expecting. We do not think there will be a further rise this year, but banks expect 2% rate. What is currently an inflationary problem may prove to be deflationary in time.

‘There are plenty of examples of central banks tightening too fast in the past. We think they will take a more cautionary approach. The Bank can vary the interest rate but could also print money – quantitative easing. But when interest rate reaches 1% the Bank said it would start selling bonds back to the market, but quantitative tightening is not something the Bank has done before so they will want to take a cautious approach.’

Alpesh Paleja, CBI lead economist, said: ‘Another rise in interest rates is warranted, given the persistence of high inflation. However, the Monetary Policy Committee are walking an increasingly fine line.

‘Further action to curb price pressures needs to be weighed against the increasing need to protect growth, particularly in light of a historic cost-of-living crunch. Households are feeling it and so are businesses, with cost pressures across the board.

‘While monetary policy is the appropriate first line of defence in tackling inflation, government needs to take further action to shore up the broader resilience of the UK economy. In the near-term, higher inflation will hit poorer households hardest, so support measures for this group will need to be kept under review. Over the longer-term, securing greener energy supply and a relentless focus on raising potential growth will bolster our ability to withstand shocks and further price pressures.’

Paul Clifford, regional CEO at Azets, said: ‘This is the first time in 13 years that the UK base rate has been at 1% – many businesses and the 1m-plus householders on variable mortgage rates aren’t used to seeing a continuous rise in borrowing costs and the impact that has on budgets.

‘This is also the fourth rise in half a year, from 0.25% in December.

‘The interest rate rise, whilst still historically low, will now place additional repayment burdens on borrowers and have a knock-on impact on businesses as spending is reined in, with SMEs likely to be hit hardest.’