LONDON -- The Bank of England confounded market expectations and held U.K. interest rates steady Thursday, saying it wanted to see what happens to unemployment after the British government ended a program that subsidized worker pay during the coronavirus pandemic.
The decision to keep the bank's main interest rate at 0.1% was a surprise given the sharp pickup in consumer prices in recent months as a result of high energy costs, labor shortages and other factors as the global economy recovers from the pandemic.
"It was a very close call," bank Governor Andrew Bailey said in a briefing. "We are in a situation where the calls are close, they're quite hard, but that's just a reflection of the position we are in."
Financial markets had been increasingly pricing a rate rise to 0.25% over recent days, prompting some mortgage lenders to withdraw some of their cheapest loans. Market reaction to the decision was instant, with the pound selling off sharply against other currencies. Against the dollar, it was down 1%, at $1.355.
The central bank's decision kept it in line with other leading economies, with the European Central Bank and U.S. Federal Reserve recently leaving interest rates unchanged. The Fed, however, announced Wednesday that it would start winding down a stimulus program it put in place during the pandemic to keep a lid on inflation.
The vote by the Bank of England's rate-setting Monetary Policy Committee was 7-2 in favor of keeping the rate unchanged. The two members who voted for a hike said it was necessary because of strong domestic and global cost pressures, according to minutes accompanying the decision.
For the majority, there was "value" in waiting for further information about the labor market following the end of the government salary program "before deciding when a tightening in monetary policy might be warranted."
For much of the time the program was in place, the government paid 80% of the salaries of employees unable to work because of lockdown measures. At its peak, it helped support over 11 million people but with many workers returning to their jobs after pandemic restrictions lifted, that fell to a little more than 1 million at the end of the program in September.
Though the bank opted against hiking rates and said many of the factors behind the recent spike in consumer prices are "transitory," such as higher oil and gas prices, it made clear that it intends to lift borrowing costs in the "coming months" to help bring inflation back toward its annual target of 2%.
Economic forecasts accompanying Thursday's decision showed the bank expects inflation to rise from 3.1% to 4.5% in November, then to about 5% in April, which would be the highest level in a decade. Inflation would then undershoot the 2% target in three years if interest rates rose to around 1% by the end of 2022, as markets are expecting.
The bank also slashed its growth forecasts for the British economy as a result of supply chain problems tied to disruptions caused by the pandemic and Britain's departure from the European Union. That was evident in the recent long lines seen at gas stations amid a shortage of truck drivers.
The bank expects the British economy to return to its pre-pandemic level by the first quarter of 2022 after previously predicting a recovery by year's end.
Many economists think the bank will raise interest rates on Dec. 16 after its next policy meeting, by which time it will have more information on unemployment, which rose by far less than anticipated during the pandemic -- to around 5% -- primarily because of the program that paid furloughed workers.
"We expect a hike in rates to come through in December, when policymakers will have at least some tentative evidence on how employment has performed after the expiration of furlough," said Luke Bartholomew, senior economist at investment company abrdn.
Alongside the rate decision, the bank's monetary panel kept its stimulus program unchanged at 895 billion pounds ($1.2 billion), though the vote was split 6-3. That program is due to expire at the end of the year.
