Interest rates raised to highest level for 14 years

The Bank of England has raised interest rates from 1.75% to 2.25% - the highest level for 14 years - and warned the UK has already fallen into recession.

It is the seventh time in a row that the Bank has raised rates as it battles to stem soaring prices.

The move takes borrowing costs to their highest since 2008, when the UK banking system faced collapse.

Interest rates have been rising since December as living costs accelerate.

Inflation - the pace at which prices rise - is currently at its highest rate for nearly 40 years. At 9.9% it is five times higher than the Bank of England's 2% target.

The 0.5 percentage point rise to 2.25% was smaller than some economists has expected.

A number had forecast the Bank would lift interest rates by 0.75 percentage points in line with similar moves by the US Federal Reserve and the European Central Bank.

Raising interest rates makes it more expensive to borrow which should, theoretically, encourage people to borrow less and spend less. It should also spur people to save more.

However, there is also a risk that it can drag on growth, harming the economy.

The Bank's Monetary Policy Committee (MPC) - which sets rates - forecast that the UK economy was already in recession. That is defined as when an economy shrinks for two consecutive quarters.

The MPC expects the UK economy to have shrunk by 0.1% between July and September, otherwise known as the third quarter. This comes after UK output shrank by 0.1% in the second quarter of 2022.

The Bank also revised its outlook for inflation, saying that the government's intervention to subsidise domestic bills through the Energy Price Guarantee was "likely to limit significantly further increases".

It now expects inflation to peak at just under 11% in October, having previously forecast it would reach 13% next month.

Nevertheless, inflation is currently nearly five times the Bank of England's 2% target and even if it peaks in October, it is expected to remain above 10% "over the following few months" before starting to fall.

Although interest rates are now at a 14-year high, they are still comparatively low by historical standards.

Following the financial crisis, borrowing costs have stayed at, or close to, record lows after the Bank of England intervened with cuts following the UK's vote to leave the European Union in 2016 as well as during the Covid pandemic.