Sterling fell sharply after the Bank of England left its main interest rate at 0.1% on Thursday, defying expectations its Monetary Policy Committee (MPC) would pull the trigger on a first rate increase since August 2018.
The pound fell 1% to $1.3549 against the dollar and shed 0.6% to £0.8525 versus the euro following the decision.
“For pound watchers who had priced in an interest rate rise today, the Bank’s move caught them like an uppercut. For now, sterling is out for the count,” said Jay Mawji, managing director of IX Prime.
The nine members of the MPC voted 7-2 in favour keeping interest rates on hold. It voted unanimously to keep its stock of corporate bond purchases at £20bn ($27bn) and 6-3 in favour of maintaining its government bond purchases at £875bn, leaving its total purchases at £895bn.
Members of the Bank's rate-setting MPC – including governor Andrew Bailey – had been flagging the possibility of a rate hike for several weeks as headline inflation reached a nine-year high of 3.2% in August, before dipping back to 3.1% in September.
Waiting for more data
Indeed, it may have been this dip in inflation, added to uncertainties in the labour market following the end of the furlough scheme in September, that persuaded the MPC against a rate increase at this meeting – preferring to wait for more data.
However, the minutes from the meeting revealed the MPC still believed it would be necessary to raise rates in the coming months to bring inflation back towards its 2% target – pushing up expectations it will hike at its next meeting on 16 December.
“At its recent meetings, the Committee has judged that some modest tightening of monetary policy over the forecast period was likely to be necessary to meet the 2% inflation target sustainably in the medium term. The latest developments, set alongside the Committee’s updated projections, reinforce this view,” the statement said.
Business friendly
Confederation of British Industry lead economist Alpesh Paleja, said the decision was the right one for businesses to maintain their growth in an economy still recovering from the COVID pandemic.
“The next few months will be something of a balancing act for the MPC,” Paleja said.
He added: “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. It’s important to remember that any future changes to interest rates will still leave monetary policy very accommodative.”
Paul Dales, chief UK economist at Capital Economics noted the MPC was also pushing back against market expectations of a series of hikes that would take the base rate to 1% by the end of next year.
“The MPC is gearing up to raise rates because the economic outlook is stronger than when it cut rates to 0.10% in March 2020 and because it wants to send a signal that it is not going to let inflation stay above the 2% target for very long,” he said.
“But equally, it is aware that the economy is still fragile and it’s sent a signal that it won’t raise rates too far, too soon.”
