Bank of England Governor Mark Carney dampened expectations of an interest rate hike coming before the end of this year as he raised the prospect of inflation falling below zero again.
The so-called “super Thursday” raft of announcements from the Bank of England sent the pound lower against major currencies after the Bank’s quarterly inflation report signalled that rates will remain on hold until early 2016.
Yesterday the Bank’s Monetary Policy Committee (MPC) voted 8-1 to leave interest rates on hold this month at 0.5%, where they have remained for more than six years.
A single dissenter, Ian McCafferty, voted to raise rates to 0.75%, in the first split vote since the end of 2014, though experts had been expecting a larger revolt, with two or more policymakers calling for a hike.
But a plunge in oil prices and the sharp recent strengthening of the pound means inflation, which has hovered at around zero, looks likely to remain at that level for the rest of 2015, leaving most MPC members in no rush to raise rates.
Mr Carney said the fall in inflation – which dipped below zero briefly earlier this year – had been “the most striking development in the UK in the past year”.
The bank forecasts the Consumer Price Index (CPI) measure of inflation at zero for July and August before edging up slightly in September, though allows for a margin of error slightly above or below its predictions.
Mr Carney said: “The near-term outlook for inflation is muted and the fall in energy prices over the past few months will continue to bear down on inflation until at least the middle of next year.
“I wouldn’t be surprised if we have another month or two of negative inflation given the very substantial move in oil prices and the changes in utility prices.”
Calum Bennie, savings expert at Scottish Friendly, said that although yesterday’s announcement seemed to delay a rates hike, savers should should start factoring in a rates rise next year.
He said: “Despite the hype around the new transparency of super Thursday, the MPC was always likely to keep interest rates on hold this month.
“With the growth forecast for the UK being upgraded and unemployment falling, the UK as a whole is likely to see more money in their back pocket. However, an increase in interest rates of even 0.25% would push up mortgage costs for millions of borrowers. Potential new and existing homebuyers shouldn’t bury their heads in the sand – now is the time to put any extra money aside in savings to build reserves.”
For the first time, the bank simultaneously announced its monetary policy for the month, released the minutes of the MPC meeting and also released its quarterly inflation report. This was followed by a press conference headed up Mr Carney.
Howard Archer, the chief UK economist for forecasting group, IHS Economics said: “So called super Thursday is a major part of the Bank of England’s determination to make its policymaking and views of the economy more transparent, and there is certainly a multitude of information to digest – almost to the point that it is possible to overdose on it!”