The Bank of England on Thursday hiked its main interest rate for the fifth straight time, as it forecast decades-high British inflation to soar further this year to above 11 percent.
BoE policymakers agreed at a regular meeting to increase the cost of borrowing by a quarter-point to 1.25 percent, the highest level since the global financial crisis in 2009.
Following the announcement, the pound slumped one percent against the dollar before rebounding.
Analysts bet that the BoE would eventually mirror the Federal Reserve by aggressively hiking rates.
- BoE lags Fed -
For now, the Bank of England is avoiding "shock and awe tactics being employed across the Atlantic", said Laith Khalaf, head of investment analysis at AJ Bell.
"Despite the UK starting to tighten monetary policy first, interest rates are now higher in the US."
The US Federal Reserve on Wednesday announced the most aggressive interest rate increase in nearly 30 years -- in a battle to drive down surging consumer prices.
The Fed's rate hike of 0.75 percentage points came after US inflation rocketed to 8.6 percent in May, the highest level in more than four decades.
UK inflation currently stands at nine percent, last seen 40 years ago.
Prices are soaring worldwide as economies reopen from pandemic lockdowns and amid the Ukraine war that is pushing already high energy costs skyward.
The BoE's latest rate hike was in response to "continuing signs of robust cost and price pressures... and the risk that those pressures become more persistent", according to minutes of the UK meeting.
A minority of BoE policymakers had voted for an increase to 1.5 percent.
London's benchmark FTSE 100 index closed down 3.1 percent in a global sell-off for equities as fears mount over a possible recession.
"It is a bloodbath for stock markets as recession fears have prompted traders to cut and run," said David Madden, market analyst at Equiti Capital.
- 'Slow poison' -
The BoE on Thursday forecast the UK economy to contract by 0.3 percent in the second quarter that ends on June 30 -- and after growing in the first three months of the year.
A recession is defined as two consecutive quarters of negative growth.
"Inflation risks being a slow poison for the economy, so the Bank of England is trying to take an antidote now by raising interest rates," said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
"However, it can only take a small dose at a time given the ailing nature of the economy... with more hikes to follow."
Higher interest rates, while boosting returns for savers, ramp up loan repayments for businesses and households.
British economic output declined for a second month in a row in April, weighed down by rocketing prices that are causing a cost-of-living crisis for millions of Britons, while increasing the risk of a UK recession this year.
Data this week also revealed the first rise in the UK unemployment rate since the end of 2020 -- although at 3.8 percent it remains at a near 50-year low point thanks to the highest amount of job vacancies on record.
At the same time, the value of average UK wages is falling at the fastest pace in more than a decade.
Fearing fallout from surging inflation, the BoE began to raise its key interest rate in December, from a record-low level of 0.1 percent.
Almost two years earlier, as the Covid-19 pandemic began to take hold, the BoE slashed the rate to just above zero and decided to pump massive sums of new cash into the economy.
In the neighbouring eurozone, the European Central Bank is next month set to raise interest rates for the first time in more than a decade.
Switzerland's central bank hiked its rate Thursday for the first time in 15 years.