The base rate is going up by another 0.5 percentage points to 2.25 per cent – the highest for 14 years – and adds to the burden for mortgage payers already struggling with the soaring cost of living.
For the average UK property costing £270,708 with a 75 per cent loan-to-value, the hike means monthly mortgage repayments will rise by about £52.
The Bank also admitted the country is almost certainly in recession. The decision is the seventh increase in a row and takes the rate to its highest level since 2008.
However, rate setters on the Monetary Policy Committee stopped short of the 0.75 percentage point rise many economists had expected.
The MPC minutes said this is because the Government’s huge step to freeze typical household energy bills at £2,500 for two years – costing £150billion – would limit the peak of inflation, currently at 9.8 percent.
Charlie Huggins, head of equities at investment specialists Wealth Club, said: “A second 0.5 percentage point increase to the base rate in seven weeks will pile further pressure on consumers and businesses, at a time when many are already being strangled by the cost-of-living crisis.
“The MPC will feel its hand was forced with the Bank of England stuck between a rock and a hard place. A gentler approach to rate rises risks sending sterling into a tailspin, and seeing inflation get even further out of control.
“But too much tightening could easily choke the life out of the economy, without significantly easing the cost-of-living crisis. It’s a horrible balancing act, with seemingly no good outcomes.”
David Beard, personal finance specialist at Lending Expert, said: “For average working families, the thought of mortgage repayments rising is a substantial blow to already over-stretched budgets.
“This rise in interest rates is a further squeeze on households at a time when consumers are desperately trying to figure out how they will afford the rising costs of food, energy bill hikes and a tank of fuel.”
Homeowners on tracker mortgages which follow the base rate will be immediately hit with more expensive payments costing them a typical £600 a year, according to trade group UK Finance.
Those who fixed their payments two or three years ago when interest rates were at rock bottom – around 1.8 million owners – will find much higher rates on offer from lenders when they come to renegotiate, it was said.
Ashley Thomas, director at Magni Finance, said: “It’s no shock that rates have gone up and mortgage borrowers will see an increase in their costs when they look to renew. I have a client who is coming to the end of his fixed rate at 1.19 percent, and the lowest rate now is four percent for a two-year fixed rate. This is a huge increase.”
Members of the MPC were split three ways on what was the best way to reduce the soaring rate of inflation, the committee minutes showed.
Bank of England Governor Andrew Bailey and four colleagues voted for the half-point increase, while three members wanted a larger hike, and one backed a 0.25 percentage point bump.
The move, together with the selling of an £840billion stockpile of government bonds, will make borrowing more expensive for Chancellor Kwasi Kwarteng.
And it comes as he prepares to announce a multi-billion pound package of tax cuts in his mini-Budget today.
This is set to alter the economy in a “material” way by boosting growth, but will also add billions of pounds to public borrowing.
The interest bill on the UK’s £2.4trillion debt mountain hit £8.2billion last month, the highest figure for August since records began in 1997, according to the Office for National Statistics.
Earlier this week, Prime Minister Liz Truss announced the Energy Bill Relief Scheme for businesses buckling under soaring gas and electricity bills. And yesterday, Mr Kwarteng confirmed that the 1.25 percent rise in National Insurance will be reversed on November 6 and its replacement – the Health and Social Care Levy, planned for April 23 – will be cancelled.
Official data shows the economy shrank 0.1 percent in the three months to June.
Bank policy-makers now believe the economy continued to shrink by 0.1 percent in the quarter to September, which would push the UK into the mildest of technical recessions – defined as two straight quarters of economic decline.
However, the rise in the base rate will once again be welcomed by savers. Average savings rates are at near 10-year highs, according to Moneyfacts.
Someone with a £20,000 nest egg would receive £100 more a year if the 0.5 percentage point rise is passed on to them, it was said.