One member preferred to increase Bank Rate by 0.25 percentage points, to 1.5%.
The Committee said that inflationary pressures in the UK and Europe have "intensified significantly since the May Monetary Policy Report".
That largely reflects a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs.
As this feeds through to retail energy prices, it will exacerbate the fall in real incomes for UK households and further increase UK CPI inflation in the near term.
CPI inflation is expected to rise more than forecast in the May Report, from 9.4% in June to just over 13% in 2022 Q4, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead.
The MPC says its remit remains clear that "the inflation target applies at all times". It predicts there is a risk that a longer period of externally generated price inflation will lead to more enduring domestic price and wage pressures. In view of these considerations, the Committee voted to increase Bank Rate by 0.5 percentage points, to 1.75%.
In its minutes, the MPC said: "The Committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response."
Paresh Raja, CEO of Market Financial Solutions, commented: “At the start of the week, the Bank of England scrapped mortgage affordability tests. Coupled with today’s significant hike in interest rates, we have to expect some changes in the property lending space. The challenge is to ensure the dual economic factors of rising interest rates and inflation do not result in inertia in the lending space.
“Flexibility from lenders is going to become so, so important in the months to come. In the current climate, using rigid tick-box methodologies will fail to serve the needs of property buyers. Rather, lenders must demonstrate a little more creativity in how they assess loan applications; they must endeavour to tailor their products and services to the needs of the individual borrower; and ensure they take a view of the bigger picture as far as affordability checks are concerned. Due diligence and rigour will, of course, be vital, but there is still room to adapt process and keep lending.”
Paul Craig, portfolio manager at Quilter Investors, said: “The Bank of England has clearly decided that now is the right time to bring out more firepower and raise rates by 0.5% for the first time since 1995. It has clearly taken note of what the Federal Reserve is doing in the US and feels it could be running out of time to grapple inflation and get it under control.
“In the back of the mind of policy makers will be the current public mood. Sentiment is shifting against the Bank of England with a recent survey pointing to more people being dissatisfied with the job it is doing than satisfied people. Clearly inflation has been stickier than expected, but the BoE has been slow to act, preferring instead to raise rates incrementally. That time is now gone, especially with concerns inflation will peak at 12%.
“The other significant shift from the BoE in recent weeks was the dropping of mortgage affordability rules. With the economic picture looking incredibly challenging, and mortgage rates subsequently rising off the back of the BoE’s moves, the decision to drop those rules is looking more and more circumspect by the day. There is a concern the lessons of 2008 are beginning to be forgotten.
“The BoE will feel justified to be this aggressive given the strength of the jobs market, but the data is beginning to roll over. Jobs growth is weakening, PMIs are beginning to show businesses seeing slowdowns, while consumer savings are being depleted. This may be a silver lining for the BoE as with that inflation itself should begin to fall, but with the new energy price cap only a matter of months away, it won’t be long until rate cuts are back on the table to deal with sluggish and potentially negative economic growth.”
Samuel Fuller, director of Financial Markets Online, added: “The independent Bank of England has never before put rates up by this much, but that doesn’t mean inflation will now come down.
“World events are still causing havoc and, with the US Fed raising rates at an even faster pace, the Bank must walk a tightrope between killing off demand and continuing to import too much inflation due to a weak Pound. The Bank is also soon to start selling off its mountain of gilts, which is already causing government borrowing costs to tick up. This could have unintended consequences too.
“Predictions of how bad it’s going to get seem to grow steadily worse, with credible forecasts that inflation will reach 15% early next year weighing heavily on sentiment. The UK might not have it as bad as places like Turkey, where inflation is pushing 80% a year, but that will come as cold comfort when the energy squeeze pushes the UK into dark and uncomfortable territory in the new year. Frankly, it’s an economic time bomb and rates are only going in one direction.”