The Bank of England has raised interest rates to 4%, from the current rate of 3.5%.
The Monetary Policy Committee (MPC) voted by a majority of 7 to 2 for the 10th rate rise in a row.
The bank said that the UK is still headed for a recession, but stressed that the economic downturn could be shallower and shorter than previously expected.
Peak-to-trough gross domestic product (GDP) is set to shrink to 1%, from around 3% in an earlier forecast.
This is because wholesale energy prices have fallen significantly since the MPC produced its last forecast, in November, and inflation has begun to fall from its peak last year.
The UK will suffer a recession of five consecutive quarters, starting in the first three months of 2023.
Some economists have suggested that the decision will mark the penultimate base rate rise, with rates peaking at 4.5% or 4.25% next month, before coming back down.
The decision comes after central bank governor Andrew Bailey provided some optimism for the future of the UK economy, insisting the country has turned a corner on rising inflation.
He said earlier this month that while Britain still faces a recession, it could be “shallower” than previously expected, indicating a less severe downturn.
On Tuesday, the International Monetary Fund (IMF) predicted the UK will be the only major economy to plunge into recession this year, with the economy set to contract by 0.3%.
Chancellor Jeremy Hunt acknowledged the grim forecast, but insisted the UK’s long-term prospects for growth are more promising.
The bank has been raising rates successively for more than a year. In December 2021 the base rate stood at just 0.1%, as policymakers tried to encourage consumer spending after Covid-19 slowed the economy.
Efforts to control inflation and bring it back down to the bank’s 2% target have led it to tighten monetary policy since then.
However, the UK’s Consumer Prices Index (CPI) inflation rate slipped slightly to 10.5% in December, down from 10.7% in November and 11.1% in October, suggesting the measure has now passed its peak.
Deutsche Bank suggested Thursday would mark the MPC’s final “forceful” hike in the tightening cycle with a 0.5 percentage point increase. Societe Generale Global Economics suggested the same, but said it expects another 0.5 percentage point hike in March, before coming back down.
The SocGen economists said: “Even though the outlook is less gloomy than expected only three months ago, we still think a recession is likely and the MPC’s forecasts should continue to predict one for this year.
“This, and the mounting evidence of some cooling in the labour market, vacancies and job growth in particular, should lead the committee to contemplate an imminent end to tightening.”
Chris Arcari, head of capital markets at Hymans Robertson, commented: “We expect the MPC to pause soon, but even though the UK faces the worst 2023 growth outlook among the major advanced economies, the committee is likely to be cautious about easing policy while the labour market remains tight.
“UK inflation likely peaked in October, at 11.1%, but is forecast to fall only gradually, averaging 7.3% year-on-year in 2023 and still remaining above 4% year-on-year at the end of 2023.
“April’s rise in the energy price guarantee, tight labour markets, and strong wage growth, are likely to contribute to stickiness in prices, however base effects, falling commodity prices and weak economic activity should reduce price pressures.
“Given inflation is still expected to be above 4% year-on-year by end of 2023, the MPC are unlikely to cut rates this year, unless the recession proves much deeper than forecast,” he added.
Don't miss the latest headlines with our twice-daily newsletter - sign up here for free.
