Bank of England raises interest rates for first time in three years to combat soaring inflation

**Lead**

The Bank of England has raised interest rates for the first time in more than three years, increasing the base rate from 0.1% to 0.25% in a bid to curb rapidly rising inflation. The decision, taken by the Monetary Policy Committee (MPC) on 16 December 2021, surprised many economists who had expected the central bank to hold fire amid renewed COVID-19 restrictions from the Omicron variant. The move signals the start of a tightening cycle that could see borrowing costs rise further in 2022.

**Context**

The last rate increase came in August 2018, when the base rate was lifted to 0.75%. It was subsequently cut to a record low of 0.1% in March 2020 as the pandemic struck. Inflation, however, has surged well above the Bank’s 2% target, hitting 5.1% in November 2021 — the highest level in a decade. The Bank has warned that inflation could peak at around 6% in the spring of 2022, driven by soaring energy prices, supply chain disruptions, and labour shortages. The MPC noted that labour market conditions had tightened significantly, with unemployment falling to 4.2% and many firms reporting difficulties hiring staff. The decision to raise rates now, despite the emergence of the Omicron variant, reflects concern that inflation expectations could become entrenched if action is delayed. The vote was 8-1 in favour of a hike, with one external member preferring to keep rates unchanged.

**Analise**

The rate rise is a landmark moment for the UK economy, ending an era of ultra-low borrowing costs that has persisted since the global financial crisis. For households, it means higher monthly mortgage payments for those on variable-rate deals, though the immediate impact is modest. Savers, who have endured years of negligible returns, may see some improvement in deposit rates. Businesses face increased costs of borrowing, which could dampen investment at a time when many are already grappling with supply chain pressures and rising input costs. However, the Bank’s action is also a vote of confidence in the recovery: it suggests policymakers believe the economy is strong enough to withstand tighter monetary policy, even as fiscal support is withdrawn.

The decision puts the Bank of England ahead of other major central banks. The Federal Reserve has signalled a faster tapering of asset purchases but has not yet raised rates; the European Central Bank remains accommodative. The move may also influence the Chancellor of the Exchequer’s budget planning, as higher interest rates increase the government’s debt servicing costs. In the longer term, analysts expect the base rate to rise further in 2022, possibly reaching 0.75% by the end of the year, though the path will depend on how quickly inflation subsides and how the economy responds to the Omicron wave.

**Fontes**

Bank of England, Monetary Policy Summary, December 2021. Office for National Statistics, Consumer Price Inflation, November 2021. Financial Times, “Bank of England raises interest rates to 0.25%”, 16 December 2021. Reuters, “Bank of England delivers surprise rate hike to 0.25%”, 16 December 2021.