The Bank of England has raised interest rates by a quarter of a percentage point to 4.5 per cent, taking borrowing costs to their highest level since 2008.
The increase, the 12th consecutive rise, is the central bank’s latest move in its continuing battle with double-digit inflation.
"Let me be clear, inflation remains too high," said Andrew Bailey, the Governor of the Bank of England, at a news conference following the new interest rate announcement.
"We have to stay the course to make sure inflation falls all the way back to the 2 per cent target."
He said the central bank would not give a "directional steer" on future interest rate decisions.
"We will be guided by the evidence," added Mr Bailey.
But inflation should "fall quite sharply over the coming months, beginning with the April number to be released in two weeks' time".
He added: "Energy prices have fallen from their peaks and that will now start to come through as lower inflation.
"Food price inflation should ease too, though we can be less sure about the timing."
After softening slightly ahead of the announcement, sterling jumped back above $1.26 as policymakers continued to speculate about future rate hikes.
The central bank no longer predicts a recession after it revised up its growth forecasts from gloomy numbers released in February, the biggest such improvement since it first published forecasts in 1997.
However, Mr Bailey said the level of economic growth was still weak, despite the central bank revising up its forecast for the year.
"Yes, it's a very big upward revision, but the level of growth is ... still weak. Let's be honest," he said.
The Bank of England said it also now expects inflation to be slower to fall than it had hoped, mostly due to unexpectedly big and persistent rises in food prices.
"If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required," the bank said, retaining the same guidance on future actions that it had in February and March.
Policymakers voted 7-2 for May's increase, in line with economists' expectations in a Reuters poll, as Monetary Policy Committee members Silvana Tenreyro and Swati Dhingra again expressed their opposition to further tightening.
According to the meeting's minutes, consumer price inflation was 10.2 per cent in the first quarter, higher than expected at the time of the February and March MPC meetings, with the upside surprise concentrated in core goods and food prices.
Food price inflation is likely to fall back more slowly than previously expected, it said.
A Reuters poll last week showed most economists expected the Bank of England to keep rates on hold after a quarter-point rise in May, but interest rate futures before Thursday's decision priced in a 5 per cent peak for interest rates this autumn.
The Bank of England started raising interest rates in late 2021 from a low of 0.1 per cent, to keep a lid on price rises that were first largely stoked by bottlenecks resulting from the lifting of coronavirus lockdown restrictions. They were subsequently pushed higher by Russia's invasion of Ukraine, which led to energy prices surging.
Inflation in the UK remains stubbornly high at 10.1 per cent, well above the BoE’s 2 per cent target.
Other major central banks such as the US Federal Reserve and the European Central Bank have also been raising interest rates at a consistent pace to try to get inflation rates down from multi-decade highs.
But inflation in the UK is double the rate of the US and is also much higher than in the eurozone.
Britain's high inflation problem stems largely from its heavy dependence on imported natural gas for power generation, leaving it particularly exposed to the surge in energy prices after Russia's invasion of Ukraine last year.
Energy prices have now fallen sharply and the central bank expects inflation to drop to 5.1 per cent by the end of this year from 10.1 per cent in March.
But this is less of a decline than the drop to 3.9 per cent it forecast in February and the Bank of England predicts inflation will not return to its 2 per cent target until early 2025.
Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin, noted that forward guidance was unchanged in May, "meaning the Bank of England is not signalling a pause as some may have hoped".
"The BoE continues to guide that if there were to be evidence of more persistent inflation pressure, then further tightening in monetary policy will be required.
"The BoE has little choice but to leave the door open for further rate increases given that inflation is double that of the US and above the pace in the eurozone.”
“On inflation, the BoE expects it to slow to 5.1 per cent by the end of 2023, higher than the 3.9 per cent forecast in February 2023. This shows the BoE judged that inflation is likely to be more persistent due to the tight labour market, this also means that UK Prime Minister Rishi Sunak’s pledge to halve inflation this year will just be met.”
Anna Leach, the Confederation of British Industry's deputy chief economist, said the future path of interest rates is uncertain.
"With ongoing bouts of banking sector turbulence in the US, risks to financial stability seem likely to persist as global interest rates continue to ratchet up and the full impact of past rises continues to feed through.
"While credit costs have so far adjusted smoothly, further material turbulence could yet disrupt activity, requiring a looser monetary stance. On the other hand, inflation could surprise to the upside, particularly if wage rises remain elevated, suggesting further rate rises," said Ms Leach.
If persistently high inflation leads to the Bank of England keeping interest rates elevated for longer than other central banks, that would typically be seen as supportive for the pound.
Martin Weale, a professor at King’s College London, believes the UK is already in the grip of a feared “wage-price spiral” and “there is a real risk” that Mr Sunak’s target of getting inflation down to about 5 per cent will not be met.
Falling short on the inflation target would be embarrassing for the Prime Minister, since it was seen as arguably the easiest of five goals he laid out earlier this year.
Other pledges, including growing the economy and stopping illegal migration across the English Channel, have proved even more difficult.
The UK's blue-chip FTSE 100 index was slightly up earlier on Thursday, helped by gains in shares of export-oriented firms as the pound declined ahead of the Bank of England’s decision.