The Bank of England has hiked its interest base rate to the highest point since the start of 2009 - and the British Chambers of Commerce has warned the rise could hit small businesses.
Its monetary policy committee (MPC) of nine members voted six to three to increase rates to 1.25% from 1% - the fifth increase in a row - as inflation continues to rise as the cost of living crisis bites.
In the minutes of the latest decision-making meeting, the Bank said Consumer Prices Index (CPI) inflation is now expected to peak above 11% in October.
The Bank said: “CPI inflation is expected to be over 9% during the next few months and to rise to slightly above 11% in October.
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“The increase in October reflects higher projected household energy prices following a prospective additional large increase in the Ofgem price cap.
“In the MPC’s latest forecasts in May, upward pressure on CPI inflation was expected to dissipate over time.
“In the main, this reflected the stabilisation of the prices of commodities, albeit at elevated levels, and other tradable goods.
“It also reflected the combined impact of weaker real incomes and tighter monetary policy on domestic demand. Monetary policy is also acting to ensure that longer-term inflation expectations are anchored at the 2% target.”
The central bank said governor Andrew Bailey, Ben Broadbent, Jon Cunliffe, Huw Pill, Dave Ramsden and Silvana Tenreyro backed a quarter point rise, but that three members, Jonathan Haskel, Catherine Mann and Michael Saunders, voted for a larger increase, to 1.5%.
The British Chambers of Commerce (BCC) warned over the impact of the rate rise on businesses.
David Bharier, head of research at the BCC, said: “While expected, the decision to raise the interest rate will add further concern to businesses amid a weakened economic outlook, soaring cost pressures, and labour shortages.
“The increase signals the Bank’s intention to tackle inflation but businesses have been raising the alarm about spiralling prices since the start of 2021 and a higher interest rate is unlikely to address many of the global causes of this.
“The increase could impact smaller businesses who may be reliant on banking or overdraft facilities, for instance, those buying goods in bulk in an attempt to offset raw material shortages.”
Suren Thiru, economics director at the ICAEW, said on Twitter that the MPC was "seeking to dampen an inflation surge it has little control over. "
He added: "Higher rates will do little to limit the global factors & supply constraints driving this inflationary spike.
"Higher rates risk inducing a recession by damaging confidence & finances of firms & consumers.
"With monetary policy on a sustained upward trajectory, further loosening of fiscal policy is likely to be needed in the near term to support key drivers of UK output (notably household spending & business investment) through this difficult period."
Jonathan Andrew, CEO of Bibby Financial Services, said: “We recognise that raising interest rates is a necessary measure to calm rampant inflation. However, the consequences for businesses – especially the UK’s 5.6 million SMEs who are already struggling to stay afloat – could be severe.
“A rate rise of 0.25% will exacerbate mounting challenges for many of them. Over a quarter (26%) of the SMEs we surveyed recently believe cashflow is a key concern , four in ten describe themselves as ‘just about breaking even’, and only half claim to be profitable.
“Rising prices clearly must be reined in, but policymakers should avoid taking actions that kill confidence and undermine growth in the long-term. We would urge them instead to closely look at meaningful interventions, such as wider tax cuts and energy grants. If the government is serious about bringing the UK economy back from the brink, they should carefully consider how they can best enable SMEs to do what they do best, which is to fuel growth.”
Zeeshan Syed, an economics expert from the University of Salford Business School, said: “There is a consensus that the bank rate must raise; however, the trouble was over how much it should increase.
“The actual question for this MPC had to decide was how far to go with the rate rise. The MPC has only gone for another increase of 0.25%, this may not be enough.
“The breakdown of inflation suggests that people are consuming, spending, and borrowing as if there is no tomorrow. That is causing an upward inflation spiral.
“Recent data suggest that out of 9.5% of inflation, 5.5% is contributed by goods and services consumption. The threat is that the trend may balloon as EY predicts that consumer borrowing will increase to 7.9% this year, a five-year high.
“In this context, the BoE is duty-bound to curtail this buy now pay later culture and inhibit the widespread and un-accounted for consumption. The more the bank increases the rate beyond expectations (above 0.50%), the more quickly this irrational exuberance will end, and fiscal sanity will prevail."
