Bank of England raises interest rates for first time in three years

The Bank of England hit borrowers with its first interest rate rise for three years on Thursday as fears over inflation soaring to a 30-year high outweighed the rapid spread of the omicron variant.

Its Monetary Policy Committee voted 8-1 in favour of lifting interest rates from 0.1pc to 0.25pc, with Silvana Tenreyro the sole dissenter.

The decision came as the Bank warned that inflation could hit 6pc next year – three times as high as its 2pc target and the highest level since 1992.

The rise will increase the squeeze on about one in five homeowners with variable rate mortgages , and comes months before the Chancellor's £36bn raid on millions of households hits pay packets.

Despite the dampening effect of the omicron variant on the economy, rate-setters also feared the strain could further stretch global supply chains and drive up prices.

It warned that a "potential worsening of global supply chain disruption could push up on inflationary pressures" and added that China's zero-Covid policy could trigger renewed disruptions at Chinese factories and ports, raising shipping costs .

Ms Tenreyro opted to hold fire on a rate rise until further evidence that "the recovery remained entrenched, and was not threatened materially by the new variant".

However, the majority of the committee agreed there was "a strong case for tightening monetary policy now, given the strength of current underlying inflationary pressures and in order to maintain price stability in the medium term".

The surprise decision had an immediate impact on the share prices of banks whose profits have been squeezed by more than a decade of near zero interest rates. Lloyds Banking Group soared almost 5pc or 2.1p to 46.5p, Barclays rose 4pc and HSBC also gained 4pc or 16p to 448p.

The move comes a day after figures showed the Consumer Price Index at a decade-high of 5.1pc .

Hussain Mehdi at HSBC Asset Management said the decision was "fairly surprising" following the emergence of omicron but conceded there were "solid reasons for immediate action".

"The labour market is tight and omicron has the potential to exacerbate supply-side constraints in goods and labour. Ongoing upside inflation risks are likely to push the MPC into further action in 2022," he said.

Samuel Tombs at Pantheon Macroeconomics said: "The MPC's decision to hike, before it knows the full extent of the economic damage wrought by the surging omicron variant, underlines how worried it is about the outlook for inflation and the risk that inflation expectations would de-anchor if it did nothing."

The move comes after the Bank blindsided financial markets last month by refusing to act despite strong language in the build-up to the decision from Andrew Bailey, the Governor, that it would "have to act" on inflation.

The minutes of the meeting revealed that the Bank's concerns over spiralling wage demands as post-Covid shortages force employers to raise wages. Vacancies reached a record high of 1.2m in the three months to November.

"Underlying earnings growth has remained above pre-pandemic rates, and the Committee continues to see upside risks around the projection for pay in the November Report."

The decision comes after the US Federal Reserve speeded up the pace of its tapering of pandemic support and signalled as many as three interest rate rises next year after inflation hit the highest level since 1982.