Bank of England confirms interest rate increase to 0.75%

The increase, by a quarter of a percentage point, takes the interest rate to its highest level since March 2009. It may be followed by further gradual, "limited" increases should the UK economy perform as expected, according to the MPC.

According to the MPC, the UK's near-term economic outlook has "evolved broadly in line with expectations" following a temporary dip in the first quarter of the year, coinciding with weather-related disruption. "Modest" growth and low unemployment are expected to continue, it said.

However, the MPC noted that future economic performance "could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal".

MPC decisions on monetary policy are taken based on a target of 2% inflation, and made "in a way that helps to sustain growth and employment".

The base rate reflects the interest charged by the Bank of England on the money it lends to other banks. It is also widely used by retail banks as a reference rate for savings accounts and loans, including mortgages.

The increase will also have a knock-on effect on annuity rates, which are based on the rate of return on government gilts; as well as on court awards and payments on which interest is charged. HM Revenue and Customs (HMRC) has announced that the interest it charges on late payments will increase in line with the base rate, from 13 August 2018 for quarterly instalment payments and from 21 August 2018 for non-quarterly instalment payments.

"The last time the Bank of England rate was at 0.75% was just under a decade ago, when there were substantially fewer banks and other lenders operating in the wholesale banking space," said banking law expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com.

"Whilst the increase provides the Bank of England with some wriggle room to drop interest rates again should there be a significant downturn following Brexit, the Bank will also be closely monitoring the impact of the rate increase on these new providers in the wholesale market as well, of course, as its effect when passed on via the retail market," he said.

The base rate was cut rapidly from 5% to 0.5% in a matter of months during the economic crisis of 2008, where it has mostly remained since March 2009. The rate was cut still further in the immediate aftermath of the UK's vote to leave the EU, to 0.25%, although this was reversed in November 2017.

The low interest rate environment has also been accompanied by a programme of asset purchases, known as quantitative easing, which is currently valued at £445 billion. QE gives the central bank an additional means of increasing the quantity of money in circulation when interest rates are almost at zero and cannot be cut further. The MPC unanimously voted that this should remain unchanged.

The next MPC meeting will take place on 13 September 2018.