In London, the FTSE 100 (^FTSE) fell 1.2% on the day, after almost every share on the blue-chip index was lower after opening. Despite a weaker pound, investment companies, property firms and hotel groups were among the fallers.
It came as the central bank pushed interest rates to 2.25%, their highest level since November 2008, and a near 14 year high.
Financial markets had expected a more hawkish hike of 0.75%, which would have marked the biggest increase in 33 years. However, it is still the seventh consecutive rise from the central bank.
Members of monetary policy committee (MPC) were split on the decision, voting 5-3-1 on the move.
Threadneedle Street also downgraded growth forecasts for the UK, and now predict that the British economy shrank by 0.1% in the third quarter of the year.
This follows a 0.1% drop recorded in three months to June, and would be the second quarterly contraction in a row, marking a technical recession.
Watch: What is a recession and how do we spot one?
The pound (GBPUSD=X) extended its losses on Thursday on the back of the news, as some investors had hoped for a more aggressive hike. It fell as much as 0.3% to $1.123 against the dollar – the lowest level in 37 years.
Sterling is now down against the US greenback by almost 17% so far this year.
Krishnapriya Banerjee, a managing director at Accenture UK, said: “As the biggest interest rate hike in more than three decades, the Bank of England is not only reacting to persistent inflationary pressures but also the recent slide in the value of the pound.
"This rate rise will be felt most acutely for households on tracker mortgages, who will now face further increases to their borrowing costs on top of rising food, energy, and fuel prices."
Last night, the US Federal Reserve delivered its third consecutive interest rate rise, lifting rates by another 75 basis points.
Chair Jerome Powell said the central bank would keep tightening rates to push down inflation, and that he would not rule out a recession. The dollar surged to a fresh two-decade high on the back of the hawkish move.
Watch: How does inflation affect interest rates?
Michael Hewson of CMC Markets said: “Not surprisingly US equity markets did not like the hawkish tone, as well as the prospect of lower growth and higher inflation, with the Fed altering its guidance on both.
“US GDP is expected to slow to 0.2% in 2022, with Powell admitting that a recession might be possible. Core inflation is forecast to decline to 4.5% this year, before falling to 2.1% by 2025.”
It also came as the number of Americans filing new claims for unemployment benefits increased moderately last week.
The Labour Department said on Thursday that initial claims for state unemployment benefits rose 5,000 to a seasonally adjusted 213,000 for the week to 17 September.
Asian stocks hit a two-year low on Thursday as the prospect of US interest rates rising further and faster than expected spooked investors.
It came as the Australian, New Zealand, Canadian and Singapore dollars hit two-year lows while China's yuan likewise reached its lowest in 24 months.
Meanwhile, the yen hovered near a 24-year low as investors digested news from the Bank of Japan, which left rates and monetary policy unchanged.
Watch: Federal Reserve raises interest rates for the fifth time this year