The Bank of England has hiked interest rates from 1.25% to 1.75% – the highest level since January 2009.
The 0.5% rise is the biggest increase in 27 years and comes amid a cost-of-living crisis that has skyrocketed bills for millions of households.
“Inflationary pressures in the UK and the rest of Europe have strengthened significantly since the May monetary policy report and the previous MPC meeting,” the bank said in a statement.
“This largely reflects a near doubling in wholesale gas prices since May, driven by Russia’s curbing of gas supplies to Europe and the risk of further restrictions.
“If this has an impact on retail energy prices, it will exacerbate the fall in real UK household incomes and further increase UK CPI inflation in the near term.
“CPI inflation is expected to rise more sharply than the May report forecast, from 9.4% in June to just over 13% in the fourth quarter of 2022, and remain at very high levels for most of 2023 before picking up the target of 2% in two years falls ahead.”
It added: “The UK is expected to enter recession from the fourth quarter of this year.
“Real after-tax household income is projected to decline sharply in 2022 and 2023, while consumption growth turns negative.”
Sterling fell 0.05% against the US dollar to 1.211 shortly after the Bank of England’s rate hike was confirmed after being 0.7% higher before the announcement. The pound fell 0.5% against the euro to 1.189.
Shadow Chancellor Rachel Reeves said: “This is further evidence that Conservatives have lost control of the economy, with skyrocketing inflation set to continue while mortgage and lending rates continue to rise.
“While families and pensioners worry about how they will pay their bills, Tory leadership candidates are touring the country announcing unworkable policies that will not help people get through this crisis.”
The nine-member Monetary Policy Committee (MPC) voted eight-to-one for the 0.5% hike.
But one member of the MPC – Silvana Tenreyro – was outvoted in calling for a quarter-point rise to 1.5%.
In the minutes of the interest rate decision meeting, the bank said the majority of the MPC believed that “a more vigorous monetary policy stance was warranted”.
It said: “Against a backdrop of further increases in energy prices, there were indications that inflationary pressures were becoming more persistent and spreading to more domestically oriented sectors.”
“Overall, a faster pace of monetary tightening at this meeting would help bring inflation back to the 2% target on a sustainable basis over the medium term and mitigate the risks of a longer and more costly tightening cycle later,” the bank added.
Tory leader hopeful former Chancellor Rishi Sunak said: “One of the most pressing challenges we face as a country is to get inflation under control as quickly as possible.
“The Bank acted today and it is imperative that any future government manages inflation and does not exacerbate it.
“Increasing borrowing will push interest rates higher, leading to higher payments on people’s mortgages. It will also make high inflation and high prices last longer and make everyone poorer.
“As Prime Minister, my priority would be to fight inflation, grow the economy, and then lower taxes.”
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