The Bank of England (BOE) kept interest rates steady on Thursday, citing signs that Britain's economy had picked up since December's election.
But the central bank dealt a blow to Boris Johnson's government by further downgrading its view of the underlying prospects for the economy to their lowest level since the second world war.
The UK's output is now expected to rise only by only 0.8% this year compared with the prediction of 1.2% the Bank made in November.
GDP growth next year has also been revised downwards to 1.4% from 1.8%, while in 2022 growth of only 1.7% is expected, compared with 2% previously.
The verdict has potential to embarrass the chancellor, Sajid Javid, who earlier this month told the Financial Times he would target economic growth of between 2.7-2.8%.
"Productivity growth might pick up a little from current rates, but was expected to remain subdued. That reflected how persistently weak productivity growth had been since the financial crisis, the consequences of the recent weakness in investment and the adjustments necessitated by Brexit," the Bank added.
Financial markets had seen a 50% chance of a cut, but the monetary policy committee (MPC) split once again 7-2 in favour of keeping the bank rate at 0.75% with external members Michael Saunders and Jonathan Haskel voting to lower rates.
This was Mark Carney's final rate-setting meeting before he stands down from Threadneedle Street in March. Carney will be replaced as governor by the head of the Financial Conduct Authority, Andrew Bailey.
Robert Alster, head of Investment Services at Close Brothers Asset Management said: "The economy towards the end of 2019 looked weak enough to make an interest rate cut look necessary, but early indicators in 2020 have allowed the MPC to demur. Business confidence is up in light of the decisive election result in December, and consumer sentiment shows signs of recovery.
"The March Budget will be key. We'll likely see promises of impressive fiscal stimulus, and the Bank will have a close eye on the data to see how businesses act in anticipation of life after the transition period."
Nigel Green, founder and CEO of deVere Group, said: "As the market had widely expected, the Bank of England voted to maintain the interest rate at 0.75%.
"The decision was made, we can assume, because the underlying economic data is ambiguous rather than compelling, and we have yet to see how much fiscal expansion the government is set to do. The announcement has caused the pound to strengthen and FTSE 100, the UK's leading stock index, to take a mild hit because of the translation effect of a stronger sterling on overseas earnings.
"However, within 24 hours of the Bank of England's announcement, any market impact will likely be forgotten. As such, investors should sit tight."
He continues: "The Bank of England is waiting for the Budget in March. The Chancellor Sajid Javid is promising an ‘infrastructure revolution' - which will take years to heat up the economy as spending on that is slow to come through. But there could be more immediate fiscal sweeties, leading to inflation fears, such as tax cuts and increased current spending on public services, including health, defence and police.
"An expansionary fiscal policy carries with it greater uncertainty over inflation and growth. The BoE will want to keep their powder dry to address this."
Green goes on to add: "For investors, and particularly those interested in sterling, it will be the Bank of England's response to a potentially expansionary fiscal policy that is the story of 2020. And for this, they have to sit tight until March."
Richard Buxton, head of UK equities at Merian Global Investors, said: "My own view is that, ultimately, cooler heads will prevail and that, behind closed doors, UK decision-makers are not seriously considering arriving at the end of the transition period with no further plans or measures in place, given widespread recognition of the economic damage that would ensue.
"The Chancellor's recent announcement at Davos that the government's "first priority is getting an agreement with the EU" would seem to lend credibility to this argument. How the detail and results of the negotiations will emerge may ultimately have more to do with how ministers perceive that the debate will play out in public opinion than anything else. Still though, having a functioning government does strengthen the UK's negotiating hand; a series of compromises by both sides would seem to be a likely, albeit untidy, outcome."
CJ Cowan, assistant portfolio manager at Quilter Investors noted: "Speculation of an impending downward adjustment in rates gathered steam in the first few weeks of the year following comments from two Monetary Policy Committee members that they would consider voting for a cut if economic data did not improve. Coupled with two members already voting for a cut since November, this made the committee voting maths look particularly tight, although this ended up not being the case.
"Interest rate markets rapidly moved to price a 70% chance of immediate action from the BoE, although this was dialled back to around 50% going into today's meeting. Indeed the UK's economic fortunes weakened during 2019 and hard economic data reported throughout January was poor. Notably, inflation was softer than expected and considerably below the BoE's 2% target while monthly GDP in November also signalled contraction of the economy.
"Recent survey data showed some degree of a post-election rebound so a majority of economists thought the MPC would hold on and see if this sentiment boost would be sustained and feed through into the hard data.
"They were proven right in Mark Carney's final MPC meeting as Governor, although this piles some pressure onto incoming Governor Andrew Bailey, who may be compelled to cut at one of his first few meetings.
"With an economy growing below potential and inflation well below target it is likely just a matter of time before the Bank reduces rates as the tentative bounce in sentiment may prove to be temporary given the uncertainty that still remains around the UK's future relationship with the EU and its other trading partners."
Matthew Cady, investment strategist at Brooks Macdonald, commented: "The Bank of England's MPC decision today to keep interest rates on hold will not draw a line under market expectations. Heading into this meeting, the UK economy has been buffeted by disappointing GDP, weak retail sales, below target inflation, softer wage growth, and even the recent bounce in manufacturing survey data was not as strong as some had hoped for.
"By putting off the decision today with a 7-2 split vote to keep interest rates unchanged, the outgoing Governor Mark Carney and the MPC are putting a lot of faith in the post-election ‘Boris bounce' to continue. We see a real risk of asymmetry with interest rates at just 0.75%. If the economy continues to post below trend economic growth, this will only raise the risk of a much bigger cut needed to interest rates later this year, but that requires a degree of manoeuvre which arguably the Bank doesn't have."
Richard Pearson, director at investment platform Selftrade, commented: "The smart money was on an interest rate cut today, so the big question now is, what happens next to help the economy? Whether or not the much-vaunted Boris bounce materialises and boosts the economy, and in turn inflation, remains to be seen.
"And of course with Brexit just days away, its impact on the economy and consumer confidence is still unknown.
"There was a flurry of buying and selling activity by Selftrade investors immediately after the election result last month, so people are clearly keeping a watchful eye on events. However, since then our retail investors seem to be keeping their powder dry in terms of making big changes to their investment portfolios.
"For cash savers, rates are pitiful and still look like they may fall further, so no change today feels nothing more than a "stay of execution". Savers who have not yet looked at investing in the stock market as an alternative to maintain and grow the value of their cash should now give it serious consideration."
Kerstin Braun, president of Stenn Group, an international provider of trade finance head quartered in London, said: "With signs that UK companies are ready to invest in a post-Brexit world, it's a good call for the Bank of England to hold rates during this transition and let the economy kick-start itself.
"There is no need to do anything to interest rates right now. There is enough dynamic coming out of the real economy to get out of the stasis that we have had over the last three and a half years.
"With momentum finally coming out of business, the best way for the government to support the turnaround is to go-ahead with large infrastructure projects that have been dangled before the voting public.
"We expect the Bank of England to hold rates for a while longer, whilst the UK adapts to post Brexit."
David Zahn, head of European Fixed Income at Franklin Templeton explained how the Bank of England's decision will affect the Budget on 11 March 2020.
"At Mark Carney's last meeting as governor of The Bank of England (BoE), the Monetary Policy Committee (MPC) has voted by a majority of seven to two to keep interest rates unchanged at 0.75%. This provides the incoming governor Andrew Bailey, who we don't know is a hawk or a dove yet, more room to manoeuvre following the UK Budget on 11th March.
"In the Budget, we anticipate we will probably see increased fiscal spending in the north of England, where Boris Johnson has seen strong support, and in Scotland and Wales. Fiscal spending will likely have an impact on the demand for gilts as the United Kingdom grows its debt to finance it. The BoE could have scope to keep interest rates on hold following the Budget in March, if it does contain a big spending push. But since there are still a number of unknowns, we believe we should see a continuation of policy from Bailey.
"Market reaction has been muted, Bond yields have backed up slightly and sterling has strengthened. However, it's important to note that both the gilt and sterling market are also taking into consideration other global factors."
Andy Scott, associate director at JCRA, said: "The Bank of England's decision to hold rates turned out to be by a majority consensus, prompting sterling to strengthen as expectations for a future rate cut were slashed. In the lead up to the decision, the market odds for a cut were 50/50, with comments from Governor Carney and members of the MPC recently over the continued slowdown in the economy driving expectations for lower rates.
"It seems the increased certainty over Brexit - and a government that has a majority to proceed with a planned fiscal expansionary policy - have eased concerns over data from the final months of 2019 that showed the economy stalling. The limited post-election surveys and economic data have also pointed to a significant rebound in business and consumers outlook for the UK economy, which should translate into a pickup in GDP growth. What remains to be seen of course is whether this optimistic sentiment is maintained and leads to a reversal of the weakening growth trend. After more than three years of uncertainty and gloom over Brexit, 2020 could reflect greater clarity and vision for the UK economy that drives a much-needed recovery."
Adrian Lowcock, head of personal investing and investment platform Willis Owen, also commented on the decision. "In Mark Carney's last meeting as the Governor of the Bank of England the decision to hold rates at 0.75% is unsurprising and the right move. Whilst the British economy slowed last quarter it is the future that matters. With the UK finally leaving the EU, a strong conservative government and a budget due in March with a focus on fiscal stimulus, recent historic economic performance is not particularly relevant and now is not the time tweak rates."