The Bank of England's (BoE) Monetary Policy Committee (MPC) held the UK's interest rates at an all-time low of 0.1% on Thursday, despite widespread anticipation it would increase the rate to 0.25%.
The MPC voted by a majority of 7-2 to maintain the Bank rate as it is.
The UK's main interest rate has been at an all-time low of 0.1% since the pandemic began, having been set at 0.75% pre-pandemic.
A rise to 0.25%, which had been anticipated, would have been the second lowest rate the bank has ever set.
The MPC also voted unanimously for the bank to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £20bn ($27bn).
The committee voted by a majority of 6-3 to continue with the existing programme, financed by the issuance of central bank reserves. This maintains the target for the stock of these government bond purchases at £875bn and so the total target stock of asset purchases at £895bn.
Following the news the pound sank, declining around 0.9% against the dollar (GBPUSD=X). It hovered near one-month lows of $1.356.
It also fell 0.4% against the euro (GBPEUR=X) to trade at €1.1731.
Analysts have said that they expect the rate to be hiked to pre-pandemic levels in the next 18 months as the economy resumes a more steady course.
The rate decision on Thursday has come under much scrutiny in the past weeks. Some argued that the bank should wait to hike rates, as the longer-term outlook for inflation is currently unclear and withdrawing support too soon could destabilise the economy heading into winter.
Many had priced a hike in, however, as odds were stacked in its favour by analysts.
Inflation in the UK is currently 3.1% and could head as high as 5% later on next year, forecasts have shown.
“On balance, the decision to keep interest rates unchanged is the right one. The upcoming rise in inflation will likely prove transitory, and there is as yet only patchy evidence of rising prices becoming embedded in both wage-setting and households’ inflation expectations," said Alpesh Paleja, CBI lead economist.
“The next few months will be something of a balancing act for the MPC. They will need to navigate monetary policy to both curb any signs of price pressures becoming more entrenched, and support the economic recovery from the pandemic,” Paelja added.
Governor Andrew Bailey says the BOE's surprise decision to leave interest rates unchanged was "a close call," rejecting the suggestion that makes him an "unreliable boyfriend"
More: https://t.co/VqaUgpOgGn pic.twitter.com/dIBrombUAS
— Bloomberg UK (@BloombergUK) November 4, 2021
“Interestingly given how long low rates have persisted in the UK, banks should be conscious there is now a generation of buyers and home owners who have never experienced significant interest rate rises," said Laura O’Sullivan, banking strategy and consulting lead at Accenture UK and Ireland.
“Banks have worked hard to support UK households throughout the pandemic and, with future rate rises still a possibility and rising prices set to continue through winter, there will nonetheless be an expectation for this continue."
O'Sullivan notes there will be a continued challenge for banks in providing the right level of support for struggling customers.
Elsewhere, on Wednesday, the US Federal Reserve passed its first major test — announcing the slow normalization of policy without upsetting markets.
In announcing that it would curtail bond purchases as growth slows and price pressures bubble over, markets responded by setting fresh records — which suggests the central bank walked the tightrope without falling off.
Wall Street economists applauded the Fed’s communication skills, which at a minimum didn’t ignite a “taper-tantrum” akin to 2013, when markets were roiled by the suggestion that monetary stimulus was being withdrawn.
Watch: Will Interest rates stay low forever?