The Monetary Policy Committee voted 6-3 to increase the rate to its highest level for over a decade.

The move is intended to curb inflation which has declined slightly but remains stubbornly high at 10.7%. The inflation target remains at 2%.

Last month the base rate was increased by 75 basis points from 2.25% to 3%. Just over one year ago the base rate was just 0.1%.

Mortgage and savings rates are expected to rise following the increase. 

At its meeting ending on 14 December 2022, the bank's Monetary Policy Committee voted by a majority of 6-3 to increase Bank Rate by 0.5 percentage points, to 3.5%.

Two members preferred to maintain Bank Rate at 3%, and one member preferred to increase Bank Rate by 0.75 percentage points, to 3.75%.

In the MPC’s November Monetary Policy Report projections the UK economy was expected to be in recession for a "prolonged period" and CPI inflation was expected to remain "very high" in the near term.

However, inflation is expected to fall sharply from mid-2023, to some way below the 2% target in years two and three of the projection. This reflected a negative contribution from energy prices, as well as the emergence of an increasing degree of economic slack and a steadily rising unemployment rate, the MPC said.

Global supply chain bottlenecks have eased, but global inflationary pressures remain elevated, the MPC report said. 

Bank staff expect UK GDP to decline by 0.1% in 2022 Q4, 0.2 percentage points stronger than expected in the November Report. Household consumption remains weak and most housing market indicators have continued to soften. Surveys of investment intentions have also "weakened further."

The MPC’ says its remit is clear that the inflation target applies "at all times", reflecting the primacy of price stability in the UK monetary policy framework.

The MPC said the economy has been subject to a "succession of very large shocks" but monetary policy is acting to ensure that longer-term inflation expectations are anchored at the 2% target.

The Committee also said that despite this latest base rate increase further increases could not be ruled out to curb inflation. 

Marcus Brookes, chief investment officer at Quilter Investors, said more rate rises could be on the way.

He said: “Despite it being widely acknowledged that the UK is in recession, the Bank of England has today delivered another interest rate rise as it seeks to tame the inflationary beast.

"For now the 75bps rise in November looks to have been a one off as today brought an additional 50bps to the bank’s rate. The good news for households and the economy is that it looks like inflation may have peaked, if this week’s stats are anything to judge by. This does not mean the end of the rate hikes though, and just like the Federal Reserve over in America, the BoE will keep hiking until it is sure inflation is on a sustained downward trajectory.

Mike Coop, chief investment officer UK, Morningstar Investment Management (EMEA), said: “With another 50-basis point rate increase from the Bank of England and inflation continuing to rise, 2023 looks set to be as rough if not rougher than 2022.

"With markets already down this year and yields much higher, we see improved opportunities for those who can look beyond the next couple of years to opportunities that could reap reward down the line. China, Germany and Emerging Market Bonds stand out as attractive longer-term opportunities.”

Adam Ruddle, chief investment Officer at LV=, said: "The Bank of England’s decision to raise interest rates by 0.5 percentage points to 3.5% is in line with our expectations.

"Though beginning to fall, inflation remains at over five times the Bank of England’s target, squeezing the incomes of millions of people in Britain. The Bank has been clear that managing inflation down is its key responsibility – even if that means subdued economic growth.

"While an increased rate helps tackle inflation it hinders economic growth and increases mortgage payments. It is increasingly likely that inflation may remain entrenched for longer than previously expected which means that interest rates will continue to rise and remain at higher levels for longer likely reaching 4% by the end of 2023.” 

Edward Hutchings, head of rates at Aviva Investors, said: "The Bank of England duly delivered on financial markets expectations of a 0.50% hike. With a 3-way split vote, it seems there is still much uncertainty amongst MPC members.

"However, the Minutes state that the BoE do expect a recession for a ‘prolonged period’! After its recent bullish run, Sterling strength could be somewhat more questionable from here and with further Quantitative Tightening to come plus a staggering amount of Gilt issuance, 2023 will continue to be volatile for the UK Gilt market.”