THE Bank of England's much-anticipated decision to hike UK interest rates from 4.25 per cent to 4.5 per cent is likely to present a fresh headache not just for households but for industry, according to business groups.
The bank's powerful Monetary Policy Committee (MPC) voted by seven-two for the raise.
It was the 12th time in a row the base rate has increased, and it now sits at its highest level since 2008, at the peak of the property crash.
And it will mean home owners whose mortgages directly track the base rate face a total average annual bill hike of around £5,000.
The decision was based on the MPC's belief that UK inflation will fall slower than previously thought, and with food prices remaining stubbornly high.
The British Chamber of Commerce's research head David Bharier said: “This shows the bank is continuing to pull the lever hard as the rate of inflation remains so high.
“The unprecedented and prolonged spike in inflation has been devastating for many small firms who have been struggling to absorb continued price rises.
“But interest rate rises can also have serious negative effects too, particularly for firms looking to borrow to manage their cash flow problems.”
He added: “The UK Government should consider further action to break this vicious cycle by boosting economic growth - through investment in infrastructure, skills training, and global trade.”
Food prices have stayed higher for longer than expected partly due to Russia's war in Ukraine and poor harvests in some European countries, ramping up the cost of living for households across the UK.
It means Consumer Prices Index (CPI) inflation is expected to decline less rapidly than the bank predicted in its last report in February.
Inflation is still expected to drop sharply from April this year, as energy prices decline and household bills are subsidised, the MPC said.
"There remain considerable uncertainties around the pace at which CPI inflation will return sustainably to the 2 per cent target," it added.
Inflation is expected to decline to 5.1 per cent in the fourth quarter of the year, meaning the Government would narrowly hit its target to halve inflation by the end of the year.
The Bank had previously thought CPI inflation could fall as low as 1 per cent by the middle of 2024 but it is now predicted to reach around 3.4 per cent.
The hike to the interest rate - which is at the highest level since 2008 - will pile more pressure on borrowers and help the Bank to bring inflation down to the 2 per cent target.
But the impact of higher rates has yet to be widely felt for households across the country, partly because many borrowers are tied to fixed-rate mortgages that have not renewed yet.
Meanwhile, economists at the Bank released a record upgrade to their economic growth expectations.
They now expect that gross domestic product (GDP) will not fall during a single quarter this year, meaning the economy is not set to decline and the UK could avoid a recession.
In February, the committee believed the economy could fall into a shallow recession starting from the first three months of the year.
Now it expects GDP to rise by 0.25 per cent this year before a 0.75 per cent increase next year and the year after. It had previously forecast a 0.5 per cent fall this year, followed by a drop of 0.25 per cent next year and a 0.25 per cent rise in 2025.
