The pound was on course for its worst week since May last night after the Bank of England refused to join the rush for higher interest rates around the world.

Sterling fell close to $1.33 against the US dollar, taking losses since last weekend to nearly 1.4 per cent, the biggest decline since it tumbled 2.3 per cent over five days of trading four months ago.

The slide came as the Bank of England held interest rates at 3.75 per cent despite concerns about inflation as a result of the Iran war and soaring energy prices.

Governor Andrew Bailey also paused the sale of the UK bonds the central bank holds through so-called quantitative tightening, helping to bring down borrowing costs on the bond markets.

By contrast, the European Central Bank has raised rates twice this year in a bid to control inflation.

The US Federal Reserve raised rates for the first time in three years on Wednesday while the Bank of Japan lifted its benchmark borrowing costs to a 31-year high.

Higher interest rates tend to strengthen a currency as investors seek higher rates of return, while lower borrowing costs do the opposite. 

The fall in sterling will hit British travellers heading overseas in the pocket as their spending power is eroded. The pound also drifted lower against the euro this week.

The Bank of England resisted pressure to raise rates on Thursday despite official figures showing inflation hit 3.1 per cent in August, well above the 2 per cent target.

Bailey did, however, signal rates could rise in the coming months as the Bank predicted a 24 per cent increase in energy bills in January, pushing inflation past 4 per cent next year.

But the apparent lack of urgency at the Bank stood in stark contrast to the immediate action taken in the US, Europe and Japan.

Analysts at Morgan Stanley said the outlook was finely balanced.

Chief UK economist Bruna Skarica said: ‘If, in the weeks ahead, oil and gas prices adjust lower to such a degree that the Bank can forecast a sub-4 per cent peak in inflation, and a quick reversal towards 2 per cent by the end of 2027, we think the MPC remains on hold. If not, we think they deliver two hikes, in November and February.’