The Bank of England's (BoE) monetary policy committee has hiked interest rates by 50 basis points (bps) from 4.5% to 5% by a majority vote of seven to two.
The move on 22 June is the thirteenth consecutive interest hike from the central bank, putting rates at the highest levels since 2008.
Markets had factored in another rate hike from the BoE, but they were split on whether the central bank would increase rates by 25bps or 50bps, considering the stickiness of inflation which, according to Consumer Prices Index data yesterday remained stagnant in May at 8.7%.
In its report, the committee said its remit is "clear that the inflation target [of 2%] applies at all times, reflecting the primacy of price stability in the UK monetary policy framework".
It added: "The framework recognises that there will be occasions when inflation will depart from the target as a result of shocks and disturbances.
"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."
Chancellor Jeremy Hunt has stood by the central bank's decision.
"High inflation is a destabilising force eating into pay cheques and slowing growth," he said. "Core inflation is higher in 14 European Union countries and interest rates are rising around the world, but the lesson from other countries is that if you stick to your guns, you bring inflation down."
Abrdn chief commercial and strategy officer Jonny Black said the hike evidenced "how exceptional economic conditions in the UK currently are".
"Clients have been living with high inflation and sustained rate rises for some time now, and many will be acutely aware that fears of a recession could intensify if the situation does not improve soon," he explained. "With the picture changing so quickly, they will appreciate reassurance and the opportunity to discuss their long-term savings and investment strategies to ensure as many outcomes are accounted for as possible."
St James's Place director of partner engagement and consultancy Alexandra Loydon said it is now "unlikely" the BoE can afford not to look at continuing to raise rates this year.
"Placing continual pressure on consumer and commercial borrowers may put the economy into recession without providing sufficient relief to the cost-of-living crisis," she warned. "For those struggling with the cost-of-living, the best advice is to understand the impact on outgoings, costs and monthly financial commitments and plan how to tackle them as best you can."
Government called to reassure savers
My Pension Expert policy director Lily Megson said the latest hike was damaging to financial confidence and particularly to anyone approaching retirement.
"While the government has made it clear that it will not intervene where interest rates are concerned, it could do more to ensure consumers do not feel pressured or panicked into making ill-informed decisions," she said.
PensionBee director of public affairs Becky O'Connor warned those approaching retirement would likely need to consider working longer or increasing their hours.
She countered: "The upside for those who are about to retire with a decent enough pension pot and who want guaranteed income when they stop work is that annuity rates are relatively high and edging higher."
