The Bank of England raised interest rates on Thursday by half a percentage point to 3.5 per cent, the highest level in 14 years, and warned that further tightening of monetary policy was likely.

In a vote showing a majority on the central bank’s Monetary Policy Committee for “forceful” action against high inflation, six of the nine MPC members supported the 0.5 percentage point rate increase, and one favoured a larger 0.75 percentage point rise.

Sterling fell and the price of UK government debt rallied after the announcement.

The BoE has now increased interest rates at each of the past nine MPC meetings: the most aggressive set of rises since 1989.

Central banks across the world have been responding to surging inflation fuelled by the Covid-19 pandemic and Russia’s invasion of Ukraine, although there are signs that price increases are peaking.

The US Federal Reserve raised its benchmark interest rate by 0.5 percentage points on Wednesday. The European Central Bank increased its deposit rate by the same margin as the Fed on Thursday.

Andrew Bailey, BoE governor, said: “I know raising interest rates has a real impact on people’s lives, but by raising interest rates we can bring inflation down sooner and help the economy begin to grow and prosper once more.”

He expressed concern that UK companies would keep raising prices too fast for too long — even though he declared that inflation, which edged down to 10.7 per cent in November, “has reached its peak”.

“The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence,” he wrote in a letter to Jeremy Hunt, the chancellor, about the MPC’s latest decision.

Bailey added that such factors justified “a further forceful monetary policy response”.

The majority of MPC members said further rate rises were likely “for a sustainable return of inflation to target”. The BoE inflation target is 2 per cent.

But they did not say whether rates would have to rise as high as financial market expectations, which at present forecast a peak of just above 4.5 per cent by the middle of 2023.

Two MPC members voted to keep interest rates on hold at 3 per cent, saying the level of borrowing costs was already high enough to curb spending and bring inflation down to the BoE’s target.

By contrast, the seven hawkish voices on the MPC were concerned that private sector wage growth, at around 7 per cent, had risen faster than they expected, which could force companies to keep increasing prices at rates well above the BoE’s target.

Catherine Mann, the MPC member who voted for the 0.75 percentage point rate rise, said the central bank needed to combat “an inflation psychology that was embedding in wage settlements and inflation expectations, and was pushing up core services and other underlying inflation measures”.

The two MPC members who voted to keep interest rates on hold — Silvana Tenreyro and Swati Dhingra — warned that the effects of tightening monetary policy to date had not been fully felt by households and companies.

As a result, a 3 per cent interest rate was “more than sufficient to bring inflation back to target, before falling below target in the medium term”, they said. 

Economists were divided in their reaction to the MPC’s decision. 

Karen Ward, market strategist at JPMorgan Asset Management, said she was “not convinced” the UK’s inflation troubles were in the past, predicting “the BoE may be able to moderate the pace and speed of interest rate hikes, but we believe we are at least 1 percentage point from the peak”.

Kallum Pickering, economist at Berenberg Bank, said financial markets should “be prepared for a further quarter-point hike at the February [MPC] meeting” with rate cuts to follow later in 2023. 

After the announcement, the yield on the UK’s two-year bond fell 0.07 percentage points to 3.36 per cent as the price of the debt instrument rose.

The yield on the 10-year bond also fell 0.07 percentage points to 3.23 per cent. Sterling sank against the dollar, sliding 0.8 per cent to $1.232, having hit its highest point in six months earlier this week.