The bank had kept interest rates steady at its regular policy meeting on Monday in the face of a two-week sell-off of Hungarian assets by investors worried over its ability to ride out the fallout of the global credit crunch.
It said in a statement it had held an extraordinary meeting on Wednesday, after markets took a fresh hammering.
"After discussing financial market developments, the Monetary Council decided to hike the benchmark base rate to 11.5 percent," the bank's rate-setting body said.
It also said it raised the bank's overnight deposit rate to 11 percent, and the overnight repo rate to 12 percent, narrowing the interest rate corridor between the two rates to 100 basis points from 200 basis points.
The forint briefly firmed to 272.00 versus the euro from 278.50 prior to the rate hike but retreated to 278.75 by 0945 GMT. It hit a low of 283 against the single currency earlier in the day.
Hungary relies on external cash to finance its current account deficit and debt, and its markets have slumped far more than its regional peers in recent weeks as investors dumped forint assets on worries over its banking system and debt.
Analysts said with the massive rate hike the central bank had shown it would defend its inflation target of 3 percent, but said that it would pay for the move with lower growth just as it is emerging from a two-year slump.
"It means the economy is toast," said Nigel Rendell, emerging market strategist with Royal Bank of Canada. "There is pretty much no chance of getting any reasonable economic growth out of Hungary in 2009."
Others said using interest rates was one of the last tools left to authorities to shore up the forint.
"It's clear that that the bank acted to halt the forint's weakening. Its measures, statements, and verbal intervention didn't do the job and the interest rate became the last option," said Orsolya Nyeste, analyst at Erste Bank.
"I think this was a fairly big step. A modest hike of 25 or 50 basis points would not have done much. They demonstrated that they are committed to their inflation goal because if the exchange rate stayed permanently at this level, that may threaten the inflation goal," she added.