The reaction in financial markets was muted after the Bank of England's decision to ignore soaring inflation and keep interest rates on hold for a 23rd month, as expected. City economists had estimated a one-in-five chance of a quarter-point increase today.
The pound dropped briefly to hit a session low of $1.6012, but later recouped some of these losses. The FTSE 100 index showed little reaction, down 0.96% at 5994 points.
Interest rates have been at 0.5%, the lowest on record, since March 2009. There is uncertainty over when borrowing costs will start rising again: most analysts expect a move towards the end of the year, while the CBI sees rates going up this spring, to end the year at 1.25%. Money markets have fully priced in a rate hike by May.
What market reaction? asked Philip Shaw, chief economist at Investec.
UK markets were nervous surrounding the possibility of a hike today. Hence we were slightly surprised by markets' muted response. A couple of minutes after the announcement, sterling had edged back only marginally against the US dollar and the euro. Short sterling futures were virtually unchanged and the yield curve is still pricing in a 25bp hike in May.
