The Bank of England (BoE) has raised interest rates by 0.25% to 4%, as it attempts to contain rising inflation driven by higher energy prices and disruption to global supplies.

The Monetary Policy Committee (MPC) voted eight to one in favour of increasing the base rate to 4%. One member backed a larger half-point increase, which would have taken rates to 4.25%.

The increase, the first in some three years, was widely expected and takes the base rate higher as inflation, currently at 3.5%, is forecast to reach around 5% by mid-2027. The central bank said the conflict in the Middle East had disrupted energy transportation and supplies, pushing up fuel costs and household utility bills.

The central bank further warned that higher energy costs could feed through into wider prices as businesses pass on increased expenses, although there is currently little evidence of significant knock-on effects on prices and wages.

Governor Andrew Bailey said: "There is now enough inflationary pressure in the pipeline caused by the rise in energy prices that an increase in bank rate is warranted.

"Today’s increase shouldn’t be seen as the first in an inevitable long sequence of hikes. But, unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase. The MPC will judge the outlook at each meeting, responding as necessary to bring inflation sustainably back to our 2% target."

Molly Monks, F.I.P.A., insolvency practitioner and founder of Parker Walsh, said: "The BoE’s decision to raise interest rates to 4% will be another concern for businesses already working hard to keep their finances on an even keel.

"For companies relying on overdrafts, loans or other forms of borrowing to fund day-to-day operations, higher interest rates can mean more of their cash is being spent servicing debt, rather than investing in the business, paying suppliers or supporting growth.

"But the real concern is the cumulative pressure. Businesses are not operating in isolation from the wider economy. The rate rise is not, by itself, a reason to assume a business will fail. But for companies already operating with little financial headroom, it is another pressure that cannot be ignored."

James Flintoft, head of investment solutions at AJ Bell, added: "The BoE has delivered its first rate hike of this cycle, which has been long-awaited by cash savers and those invested in money market funds. While the BoE has waited longer than some of its counterparts, it's now expected to move further, with markets suggesting we will see at least two hikes by September 2027. Whether or not the economy can withstand those hikes remains to be seen, and in time the Bank may be forced to veer from this path."

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