The Bank of England has announced a pre-Christmas interest rate hike from 0.1% to 0.25% despite fears over the economic impact of the Omicron variant.
Officials have been under pressure to act with inflation at a ten-year high but many observers still thought the Bank would hold fire as the new wave of COVID-19 cases takes its toll.
Members of the rate-setting monetary policy committee (MPC) voted 8-1 for the increase, which will result in higher monthly mortgage payments for home owners with loans linked to the Bank rate.
They acknowledged that the Omicron variant “is likely to weigh on near-term activity” but judged that “its impact on medium-term inflationary pressures is unclear at this stage”.
Silvana Tenreyro, the MPC member who voted against a hike, argued however that “the significant uncertainty introduced by Omicron warranted waiting until February for more clarity before considering any change”, according to minutes of the rate-setting meeting.
It was the first hike since August 2018 and comes after the Bank slashed rates to a record low 0.1% in March last year in the teeth of the first wave of coronavirus, as lockdowns descended on Britain.
The pound rose by around a cent against the US dollar to just under $1.34 and was also ahead against the euro – as Britain became the first major economy to announce a rate hike since the start of the pandemic.
The Bank had signalled that last month’s decision not to raise rates was a close call, heightening expectations of a December move.
Figures showing a bigger than expected leap in inflation to 5.1% in November added weight to the argument for a hike, and the International Monetary Fund (IMF) earlier this week urged the Bank to avoid “inaction bias” over rates.