Many traders expected the base rate to increase by 0.75 percentage points, but the Bank of England voted to raise it to 2%.
The inflation rate in the U.K. was 9.9% in August, well above the bank's 2% target. Energy and food have seen the biggest price rises, but core inflation, which excludes those components, is still at 6.3%.
Inflation is expected to peak at just under 11% in October, down from a previous forecast.
The smaller-than- expected hike came as the bank said it believed the U.K. economy was already in a recession The decline in the second quarter was followed by a small decline in the third quarter.
Many analysts and the British Chambers of Commerce have predicted that the U.K. will enter a recession by the end of the year.
The Bank Rate was lowered to 0.1% in March 2020 in order to prop up growth and spending at the start of the coronaviruses. As inflation began to rise late last year, it was one of the first central banks to start hiking.
The U.K. interest rates have risen seven times in a row, the last time being in 2008.
Government caps on energy bills would limit further increases in consumer price index inflation, according to a release from the bank. It said there had been more signs of inflation since August.
The labour market is tight and domestic costs are high. While the energy bill subsidy reduces inflation in the near term, it also means that household spending is likely to be less weak than expected over the first two years of the forecast period.
A higher 0.75 percentage point rise was voted for by three of the five members of the committee. A member voted for a raise.
The bank said it wasn't on a preset path and would continue to assess data to decide the scale, pace and timing of future changes. Shortly after the meeting, the committee voted to begin the sale of U.K. government bonds held in its asset purchase facility.
Against a backdrop of a weak British pound, recession forecasts, the European energy crisis, and a program of new economic policies, the bank made its decision.
The pound fell to multi-decade lows against the dollar this week, trading below $1.14 through Wednesday and early Thursday. It was the last time it was at this level, in 1985.
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The devaluation of the pound has been caused by a combination of strength in the dollar and gloomy forecasts for the U.K. economy.
Ahead of a fiscal event dubbed a mini-budget, the country's newly- formed government has set out numerous significant economic policy proposals.
The plan includes a reversal of the recent rise in National Insurance tax, cuts in taxes for businesses and home buyers, and a plan for investment zones with low taxes.
In order to boost economic growth, a commitment to lower taxes has been made by Truss.
The energy crisis has led to the government announcing a huge spending package to curb soaring bills.
The U.K. government borrowed more than expected last month due to a rise in government spending
The U.K. has raised interest rates to fight inflation. The Swiss central bank hiked rates by 75 basis points on Thursday. The Fed raised its rate range by the same amount.
David Bharier is the head of research at the British Chambers of Commerce.
He said that the bank's decision to raise rates will increase the risk for individuals and organizations exposed to debt burdens.
The recent energy price cap announcements should put downward pressure on the rate of inflation.
He said the coming economic statement from the finance minister Friday was a critical moment and that the bank and government could be pulling in different directions.
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