Rishi Sunak has admitted his promise to halve inflation by the end of the year has “become harder” to deliver, as the government comes huge pressure over Britain’s juddering economy.

The prime minister said he was still “confident” he could meet the target of halving inflation by the end of 2023, after the Bank of England was forced to hike interest rates 0.5 per cent to 5 per cent.

Economists warned that Britain was now on course for recession – predicting the bigger-than-expected rise by the Bank would hit the economy “like a giant wave”.

Facing accusations from senior Tories that he has been “asleep at the wheel” over inflation, Bank governor Andrew Bailey lashed out company bosses – blaming them for fuelling inflation by offering pay rises.

Calling salary hikes “unsustainable”, Mr Bailey insisted: “We cannot continue to have the current level of wage increase” – before warning firms against “seeking to rebuild profit margins” by putting up prices.

They must both hope this intervention will finally sort the inflation crisis, says James Moore.

An interest rate is a measure that tells you how high the cost of borrowing money is, or how high the rewards of saving are.

If you are borrowing money, typically from a bank, the interest rate on that money is the amount you will be charged for borrowing it.

It is a charge on top of the total amount of the loan and will be shown as a percentage of the overall.

Higher percentages mean paying more money to the lender for borrowing the money.

If you are saving money in a bank account, the interest rate on that money is the amount you will accrue on top of your savings. Banks will pay you a percentage of your total savings, typically at the end of the year.

Changes in the Bank of England’s base rate, which is the interest rate at which high street banks borrow from Threadneedle Street, has a knock-on effect on the interest rates that the former then set their mortgage borrowers.

The changes will also affect anyone with savings and anyone who is borrowing money from banks.

It will also have a wider effect on the economy. By raising the base interest rate, the BoE is hoping to temper soaring inflation and help with the cost of living crisis.

Since 1997, it has been the Bank of England’s job to set interest rates. Before then, the decision was taken by the chancellor of the exchequer, but over time the consensus grew that this was one of the causes of Britain’s chronic problem of inflation.

Why did politicians give up control of interest rates 26 years ago, asks John Rentoul.

Prime minister Rishi Sunak has admitted soaring interest rates are “hard” for cash-strapped Britons, but vowed the Government will “remain steadfast” in the battle to curb inflation after the Bank of England delivered a shock hike to 5%.

The Bank unexpectedly pushed up interest rates by half a percentage point to the highest level in almost 15 years, with policymakers and the UK Government coming under mounting pressure to control the cost-of-living crisis.

The move is set to deepen the mortgage crisis as borrowing costs are hiked up for the 13th time in a row.

Speaking at the Times CEO summit in London, the prime minister said: “The reason interest rates are going up is because inflation is too high and we’ve got to bring it down.

“This is something that makes everybody poorer, that’s what inflation does.

“That’s why we’ve got to grip it, we’ve got to reduce it and interest rates are a part of that.

“Now, I always said this would be hard and clearly it’s got harder over the past few months but it’s important that we do do that.

“The Government is going to remain steadfast in its course and stick to its plan to do that.”

The central bank’s base rate now sits at 5 per cent, after its monetary policy committee opted for its 13th consecutive hike since March 2020, as Bank officials seek to tame decades-high levels of inflation.

While markets had been bracing for a base rate rise of 0.25 per cent, fears of a more severe hike were heightened on Wednesday after official figures showed inflation had failed to fall – while, worryingly, core inflation – which excludes food and energy – hit a 31-year high.

Supermarkets have been warned by the prime minister that they must behave “responsibly and fairly” when it comes to pricing as consumers battle inflated costs.

Rishi Sunak said he wanted to see the burdens of the weekly shopping bill “easing” as ministers engage with retailers over prices.

Chancellor Jeremy Hunt has confirmed that ministers are talking with the food industry about “potential measures to ease the pressure on consumers”.

The remarks by the top two figures in Government come after the Bank of England governor Andrew Bailey suggested some retailers were raising prices as a way of increasing their profit margins in a time of stubborn inflation.

The Bank on Thursday announced a shock interest rates hike to 5% as inflation remained steadfast across April and May, with the Consumer Prices Index (CPI) inflation remaining at 8.7% despite forecasts it would fall.

Rachel Springall, a finance expert at Moneyfactscompare.co.uk, said: “Amid a cost-of-living crisis, rising interest rates can have a devastating impact on borrowers who are already struggling to cover their monthly essentials and could well lead to a rise of ‘mortgage prisoners’.

“Those borrowers who are still on a competitive fixed-rate deal for a few more years may want to consider overpaying their mortgage to reduce the size of their loan.”

She continued: “Affordability remains a key concern for any borrower, some first-time buyers may put their plans to jump onto the property ladder on hold in hopes the housing supply shortage will improve and interest rate volatility calms.

“It is imperative new buyers can comfortably build a large enough deposit and meet their mortgage repayments, which may be challenging to meet if they have limited disposable income.

“Consumers looking to remortgage may find it difficult to afford higher interest rates, so seeking independent advice is essential to consider every option available to them, such as downsizing.”