Bank Of England Rate Hike Likely Delayed By Anemic Inflation

(RTTNews) - A dovish economic outlook from the Bank of England has dampened the prospect of an interest rate hike in the near term and suggested that interest rates are unlikely to rise until late 2016 as inflation is expected to remain low.

The Monetary Policy Committee, headed by Mark Carney, voted 8-1 to hold the interest rate at 0.50 percent, the bank said in a statement on Thursday. The rate has been held at this record-low level since 2009.

At the November meeting, Ian McCafferty sought an increase in the Bank Rate by 25 basis points, as seen in August, September and October.

Policymakers voted unanimously to maintain quantitative easing at GBP 375 billion.

While economists had widely expected the bank to leave the benchmark rate and the size of its stimulus unchanged, it was hoped that at least one more rate-setter would join McCafferty this month in seeking a rate hike.

However, the dovish outlook presented by the bank in today's quarterly Inflation Report implies that a rate hike is unlikely for the time being.

"The outlook for global growth has weakened since the August Inflation Report," the bank said, downgrading its medium-term growth prospects for the UK economy.

Output growth is now expected to be at 0.6 percent in the fourth quarter. Going forward, growth is forecast to remain at around this rate.

The bank expects the economy to grow 2.7 percent this year and 2.5 percent in 2016. Then, growth is projected to improve to 2.7 percent in 2017.

In the August report, the bank had projected 2.8 percent growth for 2015 and 2.6 percent next year.

"There remain downside risks to this outlook, including that of a more abrupt slowdown in emerging economies," the bank said.

Inflation is projected to pick up over coming months, but less quickly than projected in August, the bank noted. The central bank estimated CPI inflation to rise to 0.4 percent in December, and to 0.7 percent in March 2016.

The bank expects inflation to remain below 1 percent until the second half of next year, reflecting the continuing drag from commodity and other imported goods prices.

"Beyond that, the dampening influence of sterling's past appreciation on inflation is expected to be persistent, diminishing only slowly over the MPC's forecast period," the bank said.

Inflation is expected to return to the 2 percent target in around two years, the BoE added.

"The first interest rate hike from 0.50 percent to 0.75 percent is still most likely to happen in May 2016 - but the risks now seem to be that the increase could be later than this rather than before it," IHS Global Insight economist Howard Archer said.

Meanwhile, the minutes of the this month's MPC meeting showed that all members agreed that the bank rate do rise, it is set to do so more gradually and to a lower level than in recent cycles, given the likely persistence of the headwinds weighing on the economy.

While Carney described the UK economic recovery as resilient during the press conference, some economists expressed surprise at the degree of dovishness in BoE's "Super Thursday" announcements.

"This clear dovish shift in the BoE's thinking seems a little odd in an environment where the growth numbers are looking pretty good and where service sector inflation is pushing higher," ING economist James Knightley said.