Interest rates hiked to highest level in 14 years after surprising inflation figures

Policymakers on the Bank’s Monetary Policy Committee (MPC) voted seven-to-two in favour of the interest rate increase.

The Bank's rate means that the cost of mortgages are expected to rise with as many as four million household to be hit by higher monthly repayment rates.

Earlier this month some forecasters had anticipated the Bank to maintain the base rate at four percent.

But yesterday the Consumer Prices Index (CPI) said pointed to higher than expected inflation.

It said prices rose by 10.4 per cent over the 12 months to February, up from an annual rate of 10.1 per cent the previous month. The Bank has a target of two per cent inflation.

“CPI increased unexpectedly in the latest release, but it remains likely to fall sharply over the rest of the year,” the Bank said as it explained its decision to rise interest rates.

“The economy has been subject to a sequence of very large and overlapping shocks."

It added: “Monetary policy will ensure that, as the adjustment to these shocks continues, CPI inflation will return to the two per cent target sustainably in the medium term.”

Policymakers also announced that they were revising their economic outlook, with the UK expected to see growth in the three months from the start of April.

Previously the Bank had warned the economy would contract by 0.4 per cent.

The latest hike by the Bank of England also comes after the US Federal Reserve raised its key overnight interest rate by a quarter of a percentage point, despite recent turbulence in financial markets amid fears of a banking crisis.

The pound has moved higher after the Bank of England increased interest rates by 0.25 percentage points.

Sterling was already around 0.3 per cent higher against the dollar before the announcement, but made further gains to sit 0.5 per cent at 1.232 after the increase was confirmed.

The pound was also higher against the euro, increasing by 0.25 per cent to 1.132.