The Bank of England raised its benchmark interest rates today to 0.75 per cent, its highest level since the depths of the financial crisis in March 2009 when the benchmark was slashed to 0.5 per cent.
Despite the rise, sterling fell 0.8 per cent after the decision as BoE Governor Mark Carney reiterated that future interest rate rises would be "gradual and limited"
All nine members of the BoE's Monetary Policy Committee (MPC) voted to raise the base rate by a quarter of a per cent.
Economists had been predicting a split vote thanks to mixed signals for the strength of the UK economy.
But the MPC said the economy had recovered from a seasonal slowdown exacerbated by the Beast from the East.
"The MPC continues to judge that the UK economy currently has a very limited degree of slack," the committee said in minutes published with its decision.
"Unemployment is low and is projected to fall a little further. In the MPC’s central projection, therefore, a small margin of excess demand emerges by late 2019 and builds thereafter, feeding through into higher growth in domestic costs than has been seen over recent years."
Speaking after the decision, Mr Carney said that growth in pay has increased, with further wage rises expected this year.
However, wage growth has remained below pre-crisis level and household debt has risen sharply.
Analysts said this means some households may struggle with the rise in borrowing costs, dragging down the consumer spending that drives much of the economy.
Mr Carney played down those concerns, saying that the costs of servicing that debt is lower now than it was before the crisis.
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Paul Haywood-Schiefer, a Manager at Blick Rothenberg says buy-to-let investors will suffer.
“For many people who were getting no return on their capital due to long term low interest rates and decided to invest in buy to let properties this will be another blow.
“They wanted to get better returns and for many it was also part of their retirement plans.
"The increase in the Bank of England base rate will have a knock on effect on mortgages for thousands of people.
“Those buy to let investors with mortgages may be some of the worse affected as not only do they have to deal with increased interest repayments, they will also be dealing with the fact that for the current tax year, they will only receive full interest relief on 50 per cent of the cost of interest incurred, with the other 50 per cent only receiving basic rate tax relief.”
Phil Andrew, chief executive at StepChange Debt Charity, says:
"Whilst a rise in interest rates might be right for the wider economy, from a consumer debt perspective many households are walking a precarious budget tightrope, as their incomes don't stretch to cover the basics each month.
"These are the households that a rate rise will affect most. Policymakers mustn't lose sight of what a rate rise means for real people on a tight budget."
Alfie Stirling, Head of Economics at the New Economics Foundation, says the government should have made sure a rate rise was unnecessary, by increasing public spending.
“The Bank of England won’t like to admit it, but it is caught between a rock and a hard place. Had it not raised rates today, it would have increased the risks of unsustainable household borrowing and increasingly dangerous asset bubbles.
"But the Bank also knows that starting to raise rates when the economy is so weak risks locking in the UK’s low pay, low productivity trajectory – wasting economic resources and the chance for better living standards along the way.
Today’s rate rise was a decision the Bank should never have been forced to make. When the economy is underperforming, government should be increasing public spending to get things moving again, not forcing individual families to do it themselves by going beyond their means. Until the Treasury does this, the Bank of England will continue to endure the same catch-22 every couple of months.”
Some Brexit outcomes will require the BoE to lower rates, says Mark Carney.
"There are a wide range of Brexit outcomes, but in many of them interest rates will be at least as high as they are today. We don’t need to keep our powder dry for that.
"There are certain circumstances that one can imagine... where it would be appropriate to either keep rates the same or lower them. If that’s the case, that’s what the MPC will do."
You can't just "wait, wait, wait" for the perfect scenario.
Q: How vulnerable is the UK to rising global protectionism?
As yet, there is not much evidence of increased tariffs hurting trade, Mark Carney says.
The UK can be affected by a trade war scenario where multiple sides ramp up tariffs but the main effects will come if tariffs hit business confidence.
In that instance UK will lose 1 per cent of GDP over three years. The US will be much worse affected, taking a more than 3 per cent hit to GDP, the Bank predicts.
Will the base rate rise destroy household finances?
After years of speculation it’s time to find out if our money management can withstand (slightly) higher interest rates
Pound sterling drops sharply after Bank of England announce rate hike
Traders had seemingly price in the hike but pound tumbled after the BoE's decision was published
Business groups warn interest rate hike poses threat to UK economy
The IndependentEconomist said central bank 'jumped the gun' with decision to raise base rateThe Confederation of British Industry's principal economist, Alpesh Paleja, says the case had been building for a rate rise:
“This decision was in line with our expectations. The case for another rate rise has been building, with inflationary pressures being stoked by a tight labour market and many indicators now suggesting that weak activity in the first quarter of 2018 was a blip."
Unemployment is at a 42-year low, inflation is above target and businesses, signs that would normally point to a rate rise.
However, wage growth has remained subdued and household debt has risen sharply, meaning some households could struggle if rates rise, with knock-on effects for demand in the economy. Consumers and businesses also are cautious due to an uncertain outlook.
