The Bank of England has raised interest rates from 1.75% to 2.25% - the highest level for 14 years
The Bank of England has raised interest rates from 1.75% to 2.25% - the highest level for 14 years
The central bank had previously expected the economy to grow between July and September but it now believes it will shrink by 0.1%.
It is the Bank's seventh rate rise in a row as it tries to tame soaring prices.
It takes borrowing costs to their highest since 2008, when the UK banking system faced collapse.
Inflation - the pace at which prices rise - is currently at its highest rate for nearly 40 years, at 9.9%, leaving many people facing hardship.
Prices are also widely predicted to head higher in October, despite a raising interest rates makes it more expensive to borrow which should, theoretically, encourage people to spend less and cool prices.
Many households with mortgages will see their costs rise. People on a typical tracker mortgage will have to pay about £49 more a month, while those on standard variable rate mortgages will see a £31 increase.
Those on fixed-rate deals will not be immediately affected, although their costs could jump when their deals come up for renewal.
The Bank now expects the UK economy to shrink between July and September. This comes after the economy already shrank slightly between April and June and will push the UK into recession, defined as when an economy shrinks for two consecutive quarters.
It said a smaller-than-expected bounce back in July from the June bank holiday to celebrate the Queen's Platinum Jubilee and the additional bank holiday in September for the Queen's state funeral had both hit the economic.
The Bank, however, said it now expected inflation to not rise as high as it originally expected, saying the government's help for households and firms would help limit soaring prices.
It now expects inflation to peak at just under 11% in October, having previously forecast it would reach 13% next month.
Nevertheless, inflation is currently nearly five times the Bank of England's 2% target and even if it peaks in October, it is expected to remain above 10% "over the following few months" before starting to fall.
"Should the outlook suggest more persistent inflationary pressures, including from stronger demand, the Committee will respond forcefully, as necessary," the MPC said, suggesting it was willing to raise rates further.
Some economists had expected the Bank to lift rates by 0.75 percentage points this month, in line with similar moves by the US Federal Reserve and the European Central Bank, and three of the MPC's nine members voted for such a rise.
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