"The rise will be an early warning to UK households of further increases to come, which consequently will mean higher mortgage costs."
The MPC's minutes show that members in the minority preferred to increase Bank Rate by 0.5 percentage points, to 0.75%.
The widely anticipated rise follows an increase in Bank Rate from 0.1% to 0.25% at the MPC's last meeting in December.
The Committee’s updated central projections now show Bank Rate rising to around 1.5% by the middle of 2023.
In its meeting, the MPC noted that the economic impact of the Omicron varient is "likely to be limited and of short duration", and UK GDP is expected to recover in February and March, returning to its pre-pandemic level by the end of Q1.
CPI inflation rose by 5.4% in the 12 months to December 2021, the highest rise since 1992, according to ONS statistics.
Inflation is expected to increase further in coming months, to almost 6% in February and March, before peaking at around 7.25% in April. The projected overshoot of inflation relative to the 2% target mainly reflects global energy and tradable goods prices.
The MPC predicts that, if the economy develops broadly in line with its projections, "some further modest tightening in monetary policy is likely to be appropriate in the coming months".
Joshua Elash, director of MT Finance, said: "This rate rise is an absolute necessity as a first step towards calming inflation, which has already begun to impact the broader economy.
"The rise will be an early warning to UK households of further increases to come, which consequently will mean higher mortgage costs.
"That said, borrowers needn’t panic just yet. We don’t expect this rate rise to have a significant impact on pricing in today’s mortgage market as it follows earlier significant movements in SONIA (Sterling overnight interbank average rate), which have thus far been absorbed by an industry flush with liquidity."
Richard Pike, Phoebus Software sales and marketing director, continued: “The interest rate rise by the Bank of England today is no surprise to anyone given the way that inflation is spiraling upwards. However, the fact that the vote was so tight and those in the minority wanted to increase to 0.75% is telling for the next meeting. If the Bank starts to raise rates in increments of 0.5% it will not take long for the increase to have a marked effect on mortgage interest rates.
“The cost of living is rising and, with the price of gas and electricity set to increase further, this could be a tough year for many. Although mortgage arrears fell at the end of 2021 the squeeze on finances is likely to be telling in the next few months. Lenders need to concentrate on arrears and collections and ensure they are working to ‘TCF’ guidelines and within approved forbearance parameters. There will be some households that are already finding it hard and lenders should be looking forward and ensure they are communicating with their borrowers before situations get too bad.”
Rod Lockhart, CEO of LendInvest, commented: "The Bank of England is stuck between a rock & a hard place - rates need to move up in order to control inflation, but the ever-increasing cost of living casts a dark shadow. On a brighter note, we do not expect to see a correction in house prices, given supply-demand imbalances are only adding to upside risks. We also expect mortgage rates to remain competitive, as lenders continue to protect or attract market share."
Miranda Khadr, founder and CEO at Pitch 4 Finance, said: “I think it is irresponsible for the Monetary Policy Committee to raise the base rate this month, despite the rise in inflation.
“The cost of essential day-to-day to living requirements such as food, gas and electricity, have been going up and more people are struggling to get by. There are too many things happening at once for rates to go up now. If you add in tax hikes that are due soon and higher interest rates people’s finances will suffer even more.
“Not everyone is shielded by a fixed rate, especially those with commercial mortgages. SME property developers have had to deal with rising costs of materials and labour so adding in higher mortgage payments will be a blow to them. It will lead to higher house prices and push more first-time buyers and upsizers out of the market.
“Rising debt is also a worry with Bank of England data released this week showing annual credit card debt increasing by 2% in December. Other forms of consumer credit such as car and personal loans were up by 1.1%. Raising interest rates will only add to this.”
Paul McGerrigan, CEO at Loan.co.uk, added: “In my view a rise now, so close on the heels of December’s increase, is absolutely the wrong time.
“Yes, inflation has risen sharply and is at a 30-year high, but driven by factors largely beyond control – an economy recovering from the Covid pandemic resulting in a surge in demand, and an energy supply crisis.
“The bank needs to accept there’s no magic bullet for controlling inflation in times like these – hiking interest rates now will hit consumers, especially those on lower incomes, at the worst possible time – with the energy cap rising 54 per cent and a £12bn-a-year package of tax rises coming in April.
“This is a mistake, and one which consumers will have to pay for at a time they can ill afford to.”
Lucian Cook, head of residential research at Savills, said: “This will put a bit of a squeeze on household finances and affordability. However some of the underlying economics of the housing market remains on hold: it’s currently less about affordability and more about supply and demand, and the extreme shortage of stock and high levels of demand will likely sustain some further house price growth, particularly given the high levels of equity in the market.
“Today’s rise will be a signal to homebuyers that rates will inevitably rise and that this may now happen earlier than anticipated. Whether or not the Bank of England now eases back on mortgage regulation is now a more pressing question for more highly leveraged buyers.
“The mortgage market remains very competitive and lender margins have tightened over the course of the pandemic. As such, we could see today’s rate rise passed on to borrowers in full.
“We stand by our forecasts of average 3.5% house price growth across the UK this year, likely weighted towards the first half of the year.”
