Interest rate hike in 2015 unlikely as Mark Carney warns over negative inflation
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 pound dropped by a cent against the US dollar and the euro after the Bank's quarterly inflation report signalled that rates will remain on hold until early 2016.
It came as 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."
Oil prices have halved since last year amid a glut of supply and after starting to recover have recently been pulled back again with more crude expected to flood into the market from Iran with the lifting of sanctions after it reached agreement with the US over its nuclear programme.
In the UK, two consecutive 5% cuts in household bills by leading energy supplier British Gas are also likely to weigh on inflation. Meanwhile, the strong pound - up by 20% since March 2013 including a sharp rise recently - making imports cheaper should also pull down CPI.
Together it means that households are likely to enjoy another few months of low interest rates keeping mortgage costs down while the cost of living remains flat and wage packets increase - with the Bank hiking its forecast for pay growth this year from 2.5% to 3%.
It also increased the forecast for expansion in the wider economy, from 2.5% to 2.8% amid strong consumer demand.
The Bank of England sets its interest policy to target inflation at 2% over the next couple of years and will start to increase interest rates if it sees a risk of it being pushed higher over the period.
Mr Carney indicated that the aim was to be able to benefit from a flat cost of living for the time being without being exposed to a sharp rise in the future.
He said: "This is not just about inflation, but inflation in the medium term, so people can enjoy the dividend of lower petrol and food prices without worrying about the pay back."
Interest rates have remained on hold since March 2009 when they were cut to 0.5% at the height of the financial crisis to help prop up the UK economy, but the recovery since then has heightened speculation about the need for them to begin to increase again.
Mr Carney said: "The likely timing of the first Bank rate increase is drawing closer.
"However, the exact timing of the first move cannot be predicted in advance; it will be the product of economic developments and prospects. In short, it will be data dependent."
Its latest decision also saw the Bank leave the scale of its money-printing quantitative easing (QE) programme unchanged at £375 billion.
The MPC vote on rates was the first split since a series of 7-2 votes in the last few months of 2014. The Bank for the first time published the minutes which include the voting pattern at the same time as it issued the rates decision.
It also published its quarterly Inflation Report giving its outlook for the economy, under changes to the way it discloses the process of setting rates.
The slew of data being published on a single date led to the event being dubbed "Super Thursday".
The report dampened expectations that a hike could come by the end of 2015, which had been heightened by a recent speech in which Mr Carney said that a decision about a rise would "come into sharper relief around the turn of the year".
Instead, it broadly endorsed market forecasts that a hike would come next spring - the same as had been indicated at the time of the last inflation report three months ago - though the rise in rates after that is seen as being slightly steeper.
The Bank continues to see inflation reaching its 2% target over the next couple of years though in the near-term it will be lower than it has previously thought.
The majority of the weakness in inflation is seen as being caused by energy, food and other goods prices, much of which had been expected to fade but oil prices have now again come under pressure.
This meant that the near-term outlook for inflation was weaker than at the time of its Inflation Report three months ago, with CPI "expected to remain close to zero before rising around the turn of the year".
On the other hand, wages have been increasing more strongly than the Bank had expected. But unemployment figures have disappointed, with recent figures showing the first rise for more than two years.
Meanwhile, the Bank also published the latest letter from Mr Carney to Chancellor George Osborne explaining why inflation remained more than 1% off its 2% target.
He said: "In the view of the MPC, inflation is likely to remain close to its current rate over the next few months. It is therefore likely that I will need to write further open letters to you in coming months.
"In the absence of further falls in commodity prices, however, inflation rates close to zero are unlikely to endure beyond this year."
Samuel Tombs of Capital Economics said: "The 'Super Thursday' releases from the MPC suggested that an interest rate rise is still not imminent.
"The committee wants to be cautious and wait for price pressures to emerge before pressing the lift-off button. So with a renewed period of deflation likely over coming months, interest rates look set to remain on hold until 2016."
Scotiabank's Alan Clarke said: "While the minutes of the August MPC meeting showed that one member voted for an immediate rate hike, expectations had been for two dissents and possibly more. As such, this represents a baby step closer to a rate hike rather than a stride."
David Kern, chief economist at the British Chambers of Commerce, said: "Strong growth forecasts, lower predictions for inflation and a clearer signal that the Bank of England will not rush to raise interest rates too quickly are all good news for business confidence."
TUC assistant general secretary Paul Nowak said: "The Bank is right to keep rates on hold and recognise the ongoing risks to our weak economic recovery.
"Given the Chancellor's plans for severe spending cuts, putting interest rates up too soon would hit growth hard, choking off recent gains in employment and earnings for working-age people."