This is the 11th time in a row, in less than 18 months, that the central bank has increased rates, making borrowing costs higher despite the cost of living crisis that has hit UK households.
It lifts UK interest rates to their highest since October 2008, early in the financial crisis, when Bank Rate was 4.5%.
It also comes after inflation took a surprise leap to 10.4% in February. Inflation hit a 41-year high at 11.1% in October.
The monetary policy committee voted 7-2 in favour of a 25bps increase, with two members preferring to maintain at 4%.
Seven members (governor Andrew Bailey, plus Ben Broadbent, Jon Cunliffe, Jonathan Haskel, Catherine Mann, Huw Pill and Dave Ramsden) voted in favour of raising Bank Rate by a quarter-point, to 4.25%.
But two members, Swati Dhingra and Silvana Tenreyro, voted against the proposition, preferring to maintain Bank Rate at 4%.
Nathaniel Casey, investment strategist at wealth manager Evelyn Partners, said: “The split in voting is indicative of the tricky state of affairs confronting the MPC and other central banks, with committee members having to weigh the fragility of the global banking sector against the need to bring inflation back to target.
“The recent turmoil in the banking sector, which began with collapse of Silicon Valley Bank (SVB) nearly a fortnight ago, has reminded central banks that things can break when monetary policy is rapidly tightened. Although contagion risks from the tech bank crisis and Credit Suisse look to have receded for the time being, the BoE will need to tread carefully if it decides to further tighten monetary policy from here. The Bank recently acknowledged that ‘more sharp moves in asset prices could expose weakness in parts of Britain’s financial system’ in a letter to lawmakers."
This increase will have an immediate impact on some borrowers and savers. High-street banks use the Bank's base rate to work out the interest rates it offers to customers.
Andrew Bailey explains why we have raised rates by 0.25% today. Inflation is still too high, but we continue to expect it to fall sharply from the middle of this year. Raising interest rates is the best way we have of making sure that happens. pic.twitter.com/kwhowGRZoa
— Bank of England (@bankofengland) March 23, 2023
Sam Richardson, Which? money deputy editor, said: "This rate rise will push up housing costs for already hard-pressed households – with millions more likely to be hit over the coming months.
"Those on a tracker mortgage will see an immediate impact on monthly repayments, and those on a variable rate could also see their costs rise. Mortgage owners on a fixed-term deal will not be affected for the duration of their deal, however they will likely be stung with much higher rates when the time comes to renew.
"Homeowners struggling with payments should speak to their lenders, which are required to offer support, such as temporarily reducing payments or extending the mortgage term. Discussing your options with your lender will not affect your credit rating.
"Higher rates will also have an impact on renters, as buy-to-let landlords will likely pass on increased costs to their tenants. If you are unsure about how you will be able to make monthly repayments, contact your landlord or letting agent to see if a different payment plan is available."
The Bank of England says up to 4 million households face a higher monthly mortgage bill this year. An estimated 356,000 mortgage borrowers could face difficulties with repayments by July next year, according to the Financial Conduct Authority.
When interest rates rise, more than 1.4 million people on tracker and variable rate deals usually see an immediate increase in their monthly payments.
For the average UK property costing £270,708 on a variable rate and with a 75% LTV, monthly mortgage repayments would increase by £26 a month, according to data from TotallyMoney and Moneycomms.
Three-quarters of mortgage customers hold a fixed-rate mortgage so their payments should not be affected for now but prospective house buyers or those seeking a remortgage will pay more.
Alice Haine, personal finance analyst at Bestinvest, said: "For first-time buyers shopping around for a fixed rate deal, another interest rate rise will leave them feeling very nervous. Mortgage rates rose rapidly last year – hitting a peak of 6.5% in October in the wake of the mini budget chaos when unfunded tax cuts spooked the markets. Despite interest rates continuing to rise since then, the average two- and five-year fixed rates are currently at a six-month low as most of the recent Bank Rate rises were already priced in by lenders."
Richard Donnell, executive director of research at Zoopla, commented: "We don't expect the increase in the base rate to make much difference to the outlook for the housing market. Demand for homes is down on last year but sales are still being agreed albeit at a slower rate (20% lower). People still want to move and households are resetting their plans in an environment of higher borrowing costs. Talk of a big price correction in home values has been overplayed and if you price your home sensibly, it’s likely to attract interest subject to some negotiation on the final price."
The Bank of England said in its latest monetary policy report that global growth "is expected to be stronger than projected" in its last meeting and that the UK banking system "remains resilient".
Markets predict this to be the final rate hike in the Bank of England’s run.
"Assuming the broader inflation data continues to point to an easing in pipeline pressures, then we suspect the committee will be comfortable with pausing by the time of the next meeting in May," ING economist James Smith said.
The BoE has raised its outlook for the economy in the near term, now expecting the economy to grow in second quarter.
Chancellor Jeremy Hunt said: “With rising prices strangling growth and eroding family budgets, the sooner we grip inflation the better for everyone.
“That's why we support the Bank of England's actions today and why we will continue to play our part in this fight by being responsible with the public finances, alongside providing cost of living support worth an average of £3300 per household over this year and next.”
The Bank of England follows other central banks in rising interest rates amid sticky inflation and an international banking crisis.
The US Federal Reserve raised its main rate by a quarter of a percentage point on Wednesday but indicated it would stop further increases.
The European Central Bank also raised its three main interest rates by 50 basis points last week.
This Thursday, the Swiss National Bank’s policy rate has been lifted to 1.5%, from 1%, to counter “the renewed increase in inflationary pressure”.
The Norges Bank’s Monetary Policy and Financial Stability Committee also announced today it had decided to raise the Norwegian policy rate from 2.75% to 3%, as it battles inflation.