The Bank of England base rate has been increased to 0.25% despite the spread of the Omicron covid variant.
The Bank’s Monetary Policy Committee voted by eight to one to raise the base rate, which could lead to higher mortgage and savings rates.
The rate rise is designed to curb UK inflation, which has risen to 5.1%, well above the Bank’s 2% target.
Rising energy costs could drive the inflation rate to 6% next spring.
The Bank noted that it could have waited to see how the threat of Omicron unfolds, however it decided there was a “strong case for tightening monetary policy now, given the strength of current underlying inflationary pressures and in order to maintain price stability in the medium term”.
Tomer Aboody, director of property lender MT Finance, said: “With interest rates so low for so long, boosting the UK economy and helping fuel the housing market, pushing property prices to their highest ever levels, an upwards adjustment was always on the cards.
“While this is a modest increase, the first of a few gradual raises over the next couple of years, it should help keep inflation in check, as well as dampen down the prospect of future house price increases. This is welcome, as the market has been frenzied over the past year.
“Banks and institutional mortgage lenders are still very much liquid which means competition on mortgage pricing will remain high. There may not be a plethora of sub-1 per cent rates but they will still be affordable and on the relatively cheap side.
“Too much of an increase cannot happen too quickly as that would cripple mortgage borrowers on variable rates, along with others who are coming up to their term end and needing to refinance.”
While the Bank heavily signalled that a rate rise was on the horizon last month, the decision has surprised some due to the impact of the Omicron variant on consumer confidence.
Richard Pike, Phoebus Software sales and marketing director, said: “This may be seen as an unusual step at this time of the year, especially with the latest variant spreading across the country and further covid measures coming into force.
“The inevitable interest rate rise may have been something that many believed would not happen this side of the new year but, with inflation outpacing government targets, it appears there was little choice for the MPC this month.
“Although the unemployment rate continues to fall and wage-growth has picked up, the cost of living is increasing all the time and we are already seeing serious mortgage arrears rising and house prices starting to level out.
“We are once again heading into the new year with a huge level of uncertainty with many questions for which there are no answers at the moment. Will there be further lockdowns? Can the government even afford for that to happen again? It has to be said that if we don’t get Covid under control 2022 is going to be a struggle for many.”
Rachel Reeves MP, Labour’s Shadow Chancellor of the Exchequer, responded to the rate rise decision.
She said: “Prices have been soaring and many are feeling the pinch, so families will be concerned about additional pressures on their finances from higher mortgage payments and other debt.
“The Chancellor should get on a plane back from California and get to work on a plan for growth, and crucially a plan to tackle the cost of living crisis.
“That must start immediately by scrapping VAT on household gas and electricity bills to ease some of the burden this winter.”