The Bank of England's Monetary Policy Committee has voted 7-2 to increase Bank Rate by 0.75% to 3%.
This is the eighth consecutive jump in interest rates and represents the biggest single increase since 1989.
At 3%, interest rates are now at their highest level since 2008.
One member preferred to increase Bank Rate by 0.5%, to 2.75%, and one member preferred to increase Bank Rate by 0.25%, to 2.5%.
The MPC says its updated projections for activity and inflation "describe a very challenging outlook for the UK economy".
The Bank is now predicting a long recession – two years from Q3 2022 to Q3 2024 - but stated that "further increases in Bank Rate may be required for a sustainable return of inflation to target".
The Committee also noted that "if the outlook suggests more persistent inflationary pressures, it will respond forcefully, as necessary".
CEO of Alliance Fund, Iain Crawford, commented: “The mere suggestion of a three per cent base rate will be unheard of for many homeowners who have only known interest rates to sit below one per cent until very recently.
"So they can be forgiven for feeling a tad dizzy at the prospect of what their mortgage is now likely to cost them, with the Bank of England not only implementing the largest single increase in over 33 years, but also pushing the base rate to its highest since November 2008.
"Such a hike will also stun those who were currently in a position to buy, but are now likely to find that the cost of borrowing is no longer as affordable as it was. This will not only dampen their enthusiasm within the sales market in terms of the price they are willing to pay for a property, but it’s likely to keep many exiled within the rental sector for quite some time more.
"So while the housing market may be in for a very rough ride over the coming months, it’s a safe bet that the rental market will be thriving.”
CEO of Octane Capital, Jonathan Samuels, said: “While the mortgage market has settled in recent weeks, today’s latest base rate hike will certainly sow more seeds of panic amongst the nation’s homebuyers and who can blame them after witnessing the largest single increase since 1989.
"The average homebuyer opting for a variable rate mortgage can expect to see the cost of their monthly repayment increase by around £166 per month as a result of today’s increase.
"Those currently coming to the end of a three year fixed mortgage will also see an increase as they look to secure another fixed term, with their monthly repayment increasing by an estimated £257 per month, despite having cleared a substantial chunk from their original loan.”
Managing director of Barrows and Forrester, James Forrester, added: “The prolonged period of borrowing affordability that the nation’s homebuyers have basked in for some years is well and truly at an end. This latest, quite drastic hike, shows that the Bank of England have been asleep at the wheel for some time, awaking only now to the realisation that the economy is hurtling towards a sharp bend.
"While we anticipate that the base rate will fall again come next year, we can expect market conditions to dampen over the coming months as buyers no longer have the purchasing power to pay the hefty property price premiums of the pandemic market boom, while sellers will remain stubborn in their expectations and refuse to adjust their asking price.
"Whatever happens next, homebuyers need to wake up and smell the coffee, as high loan to value mortgages at low rates are now a thing of the past.”
