Interest rates: Bank of England raises interest rates to 1.25% as cost of living continues to soar

The Bank of England has raised interest rates from 1% to 1.25% - the highest point since the start of 2009 as the cost of living continues to soar.

It is the fifth increase in a row from the Bank as it tries to tame runaway inflation.

The Bank also warned that prices for households across the country might increase further than previously thought.

Will interest rates rise even further?

Three of the nine-person Monetary Policy Committee (MPC) voted for an even bigger hike - arguing for rates to be as high as 1.5%.

“In view of continuing signs of robust cost and price pressures, including the current tightness of the labour market, and the risk that those pressures become more persistent, the committee voted to increase Bank rate by 0.25 percentage points,” it said in a notice.

For the MPC, which decides on rates, a key concern is inflation.

The committee is tasked with keeping inflation constant at around 2%, a target it is currently well clear of.

Why have interest rates gone up?

The cost of living has been soaring for months, with consumer prices index (CPI) inflation hitting a 40-year high of 9% in April when the energy price cap was hiked.

But things are set to get even worse later this year.

Experts currently expect that regulator Ofgem could put up energy prices even further, from £1,971 per year to around £2,800.

This, alongside other pressures in the economy, could lead to CPI topping 11% in October, the Bank said.

Just a month ago it had predicted inflation to peak at above 10%.

“The economy has recently been subject to a succession of very large shocks,” Bank Governor Andrew Bailey wrote in a letter to Chancellor Rishi Sunak setting out why inflation was so much higher than the 2% target.

“These shocks have pushed global energy and tradable goods prices to elevated levels.

“Those price increases have raised UK inflation and, since the United Kingdom is a net importer of these items, will necessarily weigh on most UK households’ real incomes and many UK companies’ real profits.”