Members of the Monetary Policy Committee (MPC) voted eight to one to raise rates from the historic low of 0.1%.
It comes after 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 now peak at 6% in April, while it also downgraded growth outlook to 0.6% in the fourth quarter from a previous forecast of 1%.
It said: "Most members of the Committee judged that an immediate, small increase in Bank Rate was warranted."
"The decision at this meeting was finely balanced because of the uncertainty around Covid developments.
"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."
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.
The rise marks the first rates increase since August 2018 and just the third since the financial crisis.
Steven Cameron, Pensions Director at Aegon said: “Today’s decision will provide a glimmer of hope to those with significant cash savings.
"However, they shouldn’t be lulled into a false sense of security as inflation, currently sitting at 5.1%, is forecast to rise further, peaking at 6% in April*. If the Bank of England’s prediction is correct, this will see an inflation rate 5.75% higher than interest rates, which means by Spring, those in cash could be losing 5.75% of their purchasing power over a year.
"Such a high loss for cash savers in ‘real’ terms has not been seen since for around 45 years.”