Interest rates could hit 3% by the end of this year, as the Bank of England moves to ramp up measures to fight inflation.
The monetary policy committee (MPC) yesterday increased rates from 1% to 1.25% - the fifth consecutive rise - pushing them to the highest level in 13 years.
The new rise is bad news for firms borrowing money and homeowners with variable-rate mortgages.
It also comes as finances of individuals and businesses are being squeezed by the rising cost of living, driven by record fuel and energy prices.
Inflation - the rate at which prices rise - is currently at a 40-year high of 9%.
The Bank said that rising energy prices were expected to drive living costs even higher in October, but added it would "act forcefully" if necessary should inflation pressures persist.
Capital Economics speculates that the Bank could have to raise interest rates to 3%.
But the Bank has been accused by one analyst of "bottling" the latest interest-rates decision.
By hiking rates by just 0.25%, the MPC was defying pressure to act more aggressively in the wake of the US Federal Reserve's biggest interest rate rise since 1994.
The cautious approach comes as the Bank tries to balance the risk of surging inflation with the risk of tipping the UK into a recession.
But Laith Khalaf, an analyst at AJ Bell, told the Telegraph that markets would "no doubt seize on this as a sign the Bank of England has bottled it".
The MPC also revised its forecasts for peak inflation to above 11% - up from 10% previously.
The BBC says yesterday's rates rise means that homeowners with a typical tracker mortgage will have to pay about £25 more a month. Those on standard variable-rate mortgages will see a £16 increase.
Compared with pre-December 2021 - when the Bank announced the first in this series of rate rises - tracker mortgage customers are paying around £115 more a month, and variable mortgage holders about £73 more.
However, about three-quarters of mortgage-holders have a fixed-rate deal, so have not been affected immediately.
Six of the nine members of the Bank's MPC voted to raise rates to 1.25%, but three backed a bigger increase to 1.5%.
Minutes from the Bank's meeting also reveal that it expects the UK economy will shrink by 0.3% in the April-to-June period.