Members of the Monetary Policy Committee (MPC) voted eight to one to raise rates from the historic low of 0.1%.
Pressure has been building on the Bank to bring the soaring cost of living under control, with official figures this week showing the Consumer Prices Index jumped to 5.1% – the highest level for more than a decade.
In the minutes of the decision, the Bank warned that inflation could peak at 6% in April, and downgraded the growth outlook to 0.6% in the fourth quarter from a previous forecast of 1%.
The Bank said: “Most members of the committee judged that an immediate, small increase in Bank rate was warranted.”
But it said the decision was “finely balanced”, noting that Omicron is “spreading rapidly within the United Kingdom and around the world”.
It said there was “some value in waiting for further information on the degree to which Omicron was likely to escape the protection of current vaccines and on the initial economic effects of this new wave”.
“There was, however, also a strong case for tightening monetary policy now, given the strength of current underlying inflationary pressures and in order to maintain price stability in the medium term,” it said.
Rates had been at 0.1% since March last year, when the Bank moved to prop up the economy in the early days of the pandemic.
It is the first rates increase since August 2018 and just the third since the financial crisis.
The Bank is the first of the major central banks to raise rates since the start of the pandemic.
The pound rose strongly after the decision, lifting 1.1% higher against the US dollar to 1.336, and 0.4% against the euro to 1.179.
The Bank said the spread of Omicron and restrictions to control it was set to impact economic growth in December and the first quarter of next year, with signs already showing a slowdown in sectors.
But it warned that the economic impact of the new variant could lead to even higher inflation.
The Bank also noted that the knock to UK growth was lessening with each wave of the pandemic, although it added there was “uncertainty around the extent to which that would prove to be the case on this occasion”.
Economists and financial markets have long expected the Bank to lift rates to cool inflation, but many had begun to predict a no-change decision in recent days, given the spread of Omicron.
The British Chambers of Commerce (BCC) called the Bank’s decision to hike interest rates “surprising” in light of the sharp rise of Covid cases.
Alpesh Paleja, lead economist at the CBI business group, said: “The decision to raise interest rates signals that the MPC wants to get off on the front foot in tackling rising inflation.”
But he added that policymakers may move more cautiously in raising rates further “if there are strong signs of either the virus or Plan B restrictions dampening activity and price pressures”.