The Bank of England has unexpectedly raised interest rates for the first time in three years amid growing concerns over inflation, despite the rapid spread of the coronavirus Omicron variant. Threadneedle Street’s monetary policy committee (MPC) voted by a majority of eight to one to raise rates from the historic low of 0.1% to 0.25%, judging that pressure on households from surging living costs outweighed the risks to the economy from the new variant. The increase will add to financial pressure on households with variable-rate mortgages and hit firms with higher borrowing costs, and comes after the government cut universal credit and announced plans to raise taxes from the spring. With inflation at the highest rate for a decade, the Bank warned there was unlikely to be any reprieve over the winter months from soaring energy costs driving up the rate from 5.1% at present to 6% next spring – three times its 2% official target. However, the surprise decision comes amid a severe deterioration in the economic outlook with Omicron triggering a collapse in consumer confidence, leading to a wave of cancellations for hospitality businesses during the key festive trading period. Samuel Tombs, the chief UK economist at the consultancy Pantheon Macroeconomics, said: “The MPC’s decision to hike bank rates today, before it knows the full extent of the economic damage wrought by the surging Omicron variant, underlines how worried it is about the outlook for inflation.” The pound rose sharply on the global currency market on Thursday, up by almost a cent against the dollar,trading above $1.33 after the central bank became the first of its major peer global peers to raise rates. In a sign of institutions scrambling to tackle inflationary pressures worldwide, the European Central Bank also said on Thursday it would scale back its multi-trillion euro quantitative easing pandemic support package. The US Federal Reserve said earlier this week it anticipated raising rates three times in 2022. Putting the Bank on a path to higher borrowing costs despite immediate short-term concerns over the economy, Threadneedle Street warned inflation was rising by more than expected due to soaring energy costs and global supply bottlenecks that would take time to dissipate. In a pre-emptive strike to temper inflation concerns, it said it could have waited to gauge how Omicron unfolds but 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”. With the Bank sounding the alarm on living costs and scaling back its emergency stimulus for the first time since the pandemic began, Labour said the government urgently needed to take action to support households. Rachel Reeves, the shadow chancellor, 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 Bank had wrong-footed the City in November by holding back from raising borrowing costs, preferring to wait for more official figures to assess the impact on jobs from the end of furlough despite expectations it would raise rates. Although Britain’s jobs market remained robust according to the latest available figures, economists had expected the emergence of Omicron would again tempt the Bank of England to wait for more information. In the minutes of its decision the MPC said the new wave of the pandemic would weigh on the economy in the short term, but its impact on inflation over the months ahead was still unclear. The rate-setting panel revised down its expectations for GDP growth in the final three months of the year to 0.6%, from 1% in November. Only one external member of the nine-member panel, the economist Silvana Tenreyro, voted against raising rates. The Bank warned that fresh government restrictions and voluntary social distancing would hold the economy back this month and into early 2022, and that it would stand ready to review its position by the time of the MPC’s next meeting in February. Despite the rate rise on Thursday, 0.25% is still a lower interest rate than before the pandemic, when borrowing costs were set at 0.75% before the first wave spread to Britain in early 2020. Jack Leslie, a senior economist at the Resolution Foundation thinktank, said few households would see a rise in mortgage costs as most were on fixed rates. “While the timing of the Bank’s decision to raise interest rates is odd given the economic damage currently being caused by Omicron, the fact is that it is unlikely to make much difference to either inflation or household budgets,” he said. Explaining the rate increase, the Bank said successive waves of Covid had less impact on GDP as households and businesses gradually adapted to life with the pandemic. Although there was uncertainty this time around, it said Omicron could fuel persistently high levels of inflation if it led to sustained disruption to supply chains through factory closers and bottlenecks at ports. However, Hannah Audino, an economist at the accountancy firm PwC, said speculation the Bank would embark on further rate hikes in the spring could be wide of the mark. “With [Covid-19] cases at record levels and expected to continue rising, the risk of further social distancing measures, and signs that business confidence is already weakening, it is likely this modest rate rise could be the first and only one for some time.”