The Bank of England has announced a pre-Christmas interest rate hike from 0.1% to 0.25% as it forecast that inflation would surge to 6% next year.
Officials have been under pressure to act with the CPI index of price rises already at a ten-year high but many observers still thought the Bank would hold fire due to fears over the economic impact of the Omicron variant
Members of the rate-setting monetary policy committee (MPC) voted 8-1 for the increase, which will result in higher monthly mortgage payments for home owners with loans linked to the Bank rate.
Figures this week showing inflation surging to a higher-than-expected 5.1% in November piled pressure on the Bank to act.
It now expects CPI to peak at 6% next April, a full percentage point higher than its prediction just last month and a level not seen since the early 1990s.
That partly reflects surging futures prices for gas and electricity, which will be taken into account when Ofgem announces an expected energy price cap rise for the spring.
MPC members acknowledged that Omicron “is likely to weigh on near-term activity” as the Bank cut its forecast for fourth quarter GDP growth from 1% to 0.6% and said the variant would also drag on the economy at the start of next year.
But they judged that “its impact on medium-term inflationary pressures is unclear at this stage”.
The Bank’s governor, Andrew Bailey, said: “We’re concerned about inflation in the medium term and we’re seeing things now that can threaten that. So that’s why we have to act.”
Silvana Tenreyro, the MPC member who voted against a hike, argued however that “the significant uncertainty introduced by Omicron warranted waiting until February for more clarity before considering any change”, according to minutes of the rate-setting meeting.
It was the first rise since August 2018 and comes after the Bank slashed rates to a record low 0.1% in March last year in the teeth of the first wave of coronavirus, as lockdowns descended on Britain.
The pound rose by around a cent against the US dollar to just under $1.34 and was also ahead against the euro – as Britain became the first major economy to announce a rate hike since the start of the pandemic.
It came hours after the MPC’s counterparts at the US Federal Reserve took a hawkish turn by quickening the pace at which they will withdraw emergency pandemic stimulus from the American economy and indicated that they could raise rates three times next year.
The Bank of England had signalled that last month’s surprise decision not to raise rates was a close call, heightening expectations of a December move.
Latest inflation figures added weight to the argument for a hike, and the International Monetary Fund (IMF) earlier this week urged the Bank to avoid “inaction bias” over rates.
Those concerns outweighed fears about growth – which intensified earlier after survey data suggested it had slowed to its weakest pace since February in the face of Omicron restrictions.
Laura Suter, head of personal finance at AJ Bell, said: “While Omicron is still a worry for the Bank, rampant inflation is clearly an even bigger concern.”
Economists at HSBC said: “The rate rise announced today is a surprise to the market and to the majority of economists (including ourselves), who had expected that the uncertainty around the Omicron variant would have been enough to keep them hold – at least for another seven weeks until the February meeting.
“But it is not a surprise in the sense that it was always going to be a finely balanced decision: the BoE has been flagging a forthcoming hike, and the data this week have been exceptionally hawkish.”