The Bank of England's monetary policy committee (MPC) hiked interest rates half a point to 5.0%.
It was the 13th rate rise in a row as policymakers look to get a grip on inflation that has remained stubbornly high.
The MPC voted by a majority of 7–2 to increase rate to 5%, with two members preferred to maintain bank rate at 4.5%, the same number dissenting as in the previous meeting.
Despite making a larger than expected 50 basis points than had been expected a few weeks ago, the rate setting committee still says it may need to raise rates further.
"If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required," the MPC said.
Macro data higher than expected
Explaining its decision, the MPC said at its previous meeting in early May the market-implied path for the base rate averaged just over 4% over the next three years.
"Since then, gilt yields have risen materially, particularly at shorter maturities, now suggesting a path for Bank Rate that averages around 5½%. Mortgage rates have also risen notably. The sterling effective exchange rate has appreciated further.
"The Committee is continuing to monitor closely the impact of the significant increases in Bank Rate so far.
"As set out in the May Report, the greater share of fixed-rate mortgages means that the full impact of the increase in Bank Rate to date will not be felt for some time."
It was noted that business surveys continue to suggest the economy is still growing slowly, with household spending strengthening a little, employment increasing more than expected, wage growth above expectations in May, but indications of future pay growth pointing to easing over the rest of this year, however.
Inflation was also 0.3 percentage points higher than expected in the May report, with services CPI inflation rising higher than expected and core goods price inflation also been much stronger than projected.
"In general, news in the latter component is less likely to imply persistent inflationary pressures," the MPC said.
It said CPI inflation is expected to "fall significantly" during the course of the year as energy prices drop, while services CPI inflation is projected to remain broadly unchanged in the near term, with goods inflation declining later this year and food price inflation projected to fall further.
The MPC said it "recognises that the second-round effects in domestic price and wage developments generated by external cost shocks are likely to take longer to unwind than they did to emerge" with the "significant upside news in recent data that indicates more persistence in the inflation process".
"The MPC will continue to monitor closely indications of persistent inflationary pressures in the economy as a whole, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required."
Stubborn inflation
George Lagarias, chief economist at Mazars, said: “A double rate hike was appropriate following yesterday’s bad inflation number.
“The wage-price spiral won’t break itself. The central bank’s move is a step towards the right direction. Unfortunately, from where we are today, there aren’t many good options. The UK is in a vicious inflation cycle plain and simple. Unless demand is decisively curtailed, there’s a real danger that inflation will get out of hand.
“Make no mistake, this means significant pain for consumers. The government could step up to alleviate pressures in the labour market and increase housing availability, which should help diffuse the inflation bomb faster. Presently, markets are discounting four more rate hikes, a one percent higher rate by the end of the year.”
Market analyst Neil Wilson at Markets.com said: "They’ve gone big today but are hardly leaning into the market pricing towards 6% - guidance still pretty nebulous. I find it hard to think they will stop now with core inflation where it is…but they continue to point to lagged effects and don’t want to commit and send market pricing even higher."
Ed Hutchings, head of rates at Aviva Investors, said the split vote on the decision shows that some MPC members believe taking the rate from 0.10% to 5.0% without a pause along the way is taking things too far.
“Further to this, with the market still priced for a further 1.0% of hikes, it could still be some time before we do actually see a pause. There’s little doubt that the next six to nine months will prove tough for the UK economy. Today’s hike should now see gilt yields supported as it is likely we are closer to the end of the hiking cycle. However, with growth likely to get hit going forward, sterling could face some weakness.”
** Update: adds detail and reaction comments **