The Bank of England has raised the base rate of interest from 0.75% to 1%, the highest level since 2009.
It’s the fourth consecutive increase since December and comes as higher fuel, energy and food prices have pushed inflation to 7%.
The Bank said it expects inflation to rise further to around 10% by the end of the year, a rate not seen since 1982 and well above the 2% target.
It also warned that the UK economy is set to shrink next year.
The Monetary Policy Committee (MPC) slashed its forecast for GDP growth in 2023 from 1.25% to -0.25%, which would leave the UK at risk of falling into recession.
As the economy slows down unemployment is expected to climb, rising to around 5.5% by the middle of 2025.
The MPC voted by a majority of 6-3 to increase interest rates by 0.25 percentage points, with three members voting for an even greater increase of 0.5 points to 1.25%.
Rates may go up again, with the Bank noting that most members of the committee “judged that some degree of further tightening in monetary policy may still be appropriate in the coming months”.