The Bank of England has today became the world's first major central bank to raise borrowing costs since the coronavirus pandemic hammered the global economy, as it said inflation was likely to hit 6% in April - three times its target level.
Most economists polled by Reuters had expected the Bank of England's Monetary Policy Committee to keep UK rates at 0.1% due to the Omicron variant of the coronavirus which caused a record number of COVID-19 cases in Britain yesterday.
But the MPC saw warning signs that underlying inflation pressure might become long-lasting after its recent spike.
"The labour market is tight and has continued to tighten, and there are some signs of greater persistence in domestic cost and price pressures," the Bank of England said.
"Although the Omicron variant is likely to weigh on near-term activity, its impact on medium-term inflationary pressures is unclear at this stage," it added.
Sterling jumped by three quarters of a cent against the US dollar to its highest since November 30.
The nine-member MPC voted 8-1 to raise UK rates to 0.25% from 0.1%, with external member Silvana Tenreyro providing the only dissenting voice.
The MPC also pointed to the likelihood of further rate hikes ahead.
"The Committee continues to judge that there are two-sided risks around the inflation outlook in the medium term, but that some modest tightening of monetary policy over the forecast period is likely to be necessary to meet the 2% inflation target sustainably," it said.
The Bank of England cut its growth forecasts for December and the first quarter of 2022 because of the spread of Omicron which could lead to "a very high number of infections over a very short period."
But it also said Britain and the world economy were in a "materially different" situation than at the start of the pandemic, with inflation now elevated.
It focused more on "upside risks" around pay trends and said there was little sign of a jump in unemployment after the end of the government's job-supporting furlough scheme on September 30.
The British central bank wrong-footed many investors six weeks ago when it kept rates on hold, giving itself more time to see the extent of any hit to the labour market from the end of the scheme.
At its December meeting, the MPC voted 9-0 to keep the central bank's government bond-buying programme at its target size of £875 billion.
The Bank of England has also bought £20 billion of corporate bonds.
Today's rate hike put the Bank of England ahead of the US Federal Reserve. On Wednesday, the Fed said it was speeding up a phase-out of its bond-buying stimulus, in a first step ahead of possibly three interest rate rises in 2022.
The European Central Bank and the Bank of Japan are further away from raising borrowing costs.