UK Interest Rates were Raised to 1.25% by the Bank of England

UK interest rates have risen further as the Bank of England attempts to stem the pace of soaring prices.

Rates have increased from 1% to 1.25%, the fifth consecutive rise, pushing them to the highest level in 13 years.

It comes as finances are being squeezed by the rising cost of living, driven by record fuel and energy prices.

Inflation – the rate at which prices rise – is currently at a 40-year high of 9%, and the Bank warned it could surpass 11% later this year.

The Bank said rising energy prices were expected to drive living costs even higher in October but added it would “act forcefully” if necessary, should inflation pressures persist.

The rate rise means that homeowners with a typical tracker mortgage will have to pay about £25 more a month. Those on standard variable rate mortgages will see a £16 increase.

However, about three-quarters of mortgage-holders have a fixed rate deal, so will not be immediately affected.

Six of the nine members of the Bank’s Monetary Policy Committee voted to raise rates to 1.25%, but three backed a bigger increase to 1.5%.

Minutes from the Bank’s meeting also reveal that it expects the UK economy will shrink by 0.3% in the April-to-June period.

The Bank did not update its outlook for the July-to-September quarter, but it has been said previously that expects the economy to grow during this period.

If it does, then the UK would avoid a recession this year – with a recession defined as the economy shrinking for two consecutive quarters.

However, the Bank has also said previously that it expects the economy to shrink in the final three months of this year, during which the price cap on household energy bills is expected to be increased from £1,971 per year to about £2,800.

The rise in domestic gas and electricity bills will lift the increase in the cost of living to “slightly above” 11% in October, the Bank said.

It means the rate of inflation will be more than five times the Bank’s inflation target of 2%.