Bank of England raises interest rates to 2.25% - highest level for 14 years

By a majority of five to four, the Monetary Policy Committee of the Bank of England has decided to raise interest rates to 2.25% - a 0.5% rise - to the highest level in 14 years.

Higher interest rates mean:

• More expensive mortgages – typically a £300,000 mortgage will cost £75 more per month
• Better rates for savers – but many banks won’t improve interest on deposits
• Higher loan costs for businesses - at a time when many are struggling to pay energy bills
• Perhaps a partial help to stop the £ depreciating against the US dollar

The Bank thinks that the UK economy is already in a recession. Higher interest rates now risk making this deeper. This is especially the case given the record low for consumer confidence according to recent survey evidence. Business optimism is also fragile.

But the Bank of England is worried that the government’s tax cuts as part of their “dash for growth” will cause increased UK inflation.

The Bank is remaining committed to driving down inflation, and indeed there are some committee members who voted for a 0.75% rise in rates at a time when the Bank is of the view that we're entering a recession. This seems counter-intuitive.