The Bank of England has increased rates for the first time since the start of the pandemic, despite growing concerns for the economy as Covid case numbers surge.
The Bank’s rate-setting committee voted eight to one in favour of increasing interest rates to 0.25 per cent from a record low of 0.1 per cent.
Silvana Tenreyro was the only member to vote against an increase. The decision came after inflation soared to 5.1 per cent – well above the Bank’s target rate of 2 per cent.
The central bank will also keep up its £895 billion quantitative easing programme unchanged.
Typically central banks do not raise interest rates when the economy is struggling because more expensive borrowing tends to dampen demand.
Laying out the reasons for its decision on Thursday, the Bank pointed to its projections for the economic recovery, made in November.
However, the omicron variant has since begun to spread rapidly in the UK, raising the prospect of further restrictions which would slow economic growth.
In the minutes of the decision, the Bank warned that inflation could hit 6 per cent in April. It also downgraded its forecast for growth in the fourth quarter of this year to 0.6 per cent from 1 per cent.
It said: “Most members of the Committee judged that an immediate, small increase in Bank Rate was warranted.”
“The decision at this meeting was finely balanced because of the uncertainty around Covid developments.”
Wednesday saw a record number of confirmed Covid cases and a Downing Street briefing in which the public was advised to limit social contacts and “think carefully” about socialising.
Despite the advice, government ministers have so far refused to lay out a package of support for businesses who are pleading for help.
City analysts remained sceptical about how much impact Thursday’s rate rise would have on inflation.
“Like most economists, the Bank has been caught off-guard by the speed of price rises,” said Ed Monk, associate director at Fidelity International.
“Even with the action taken today, households should expect their costs to continue to rise for some time. The small rise in rates will have a limited impact on demand and may take time to filter through to consumer behaviour, while many of the factors driving inflation remain outside of the Bank’s control.
“A rise in UK borrowing costs won’t ease up clogged supply chains or lower shipping costs.”