Bank of England gives no sign of rushing to raise rates

The Bank of England gave no sign that it was in any more of a hurry to raise interest rates on Thursday, predicting near-zero inflation would pick up only slowly even if borrowing costs stay on hold all of next year.

Sterling fell sharply after the BoE's announcement, which contrasted with the tone of the US Federal Reserve, whose chair Janet Yellen said on Wednesday that a US rate rise was a prospect for December.

Only one Bank of England policymaker, Ian McCafferty, voted to raise interest rates this month, as most economists had expected, while the other eight on the Monetary Policy Committee opted to keep them at a record-low 0.5 per cent, where they have been since March 2009. The main ECB rate is 0.05 per cent.

The BoE trimmed its forecast for economic growth for this year and 2016 and warned emerging markets could get stuck in a rut of slower growth.

“The outlook for global growth has weakened since the August Inflation Report,” the BoE said in its quarterly forecast update. “There remain downside risks to this outlook, including that of a more abrupt slowdown in emerging economies.”

Surprise

The BoE message on inflation surprised investors, who in recent days had started to price in a rate move earlier than they had in recent weeks.

Sterling fell more than a cent against the dollar and government bond yields dropped sharply.

Ross Walker, an economist with RBS, said he was sticking with his view that the BoE would raise interest rates in August next year.

“It’s not a radically different signal versus (the BoE’s outlook published in) August, but if the Bank was teeing up a February rate hike, it would not have produced this set of forecasts,” he said.

BoE governor Mark Carney has previously said a decision on whether to raise interest rates would become clearer around the turn of the year.

Reuters