‘Super Thursday’ reveals forecast for slow pick-up in inflation

Markets have ramped up expectations of a rise in rates several times in the past three years, only to be disappointed.

The bank’s report increased its forecast for expansion of the UK economy this year from 2.5 to 2.8 per cent, mainly as a result of strong consumer demand.

“The likely timing of the first Bank Rate increase is drawing closer”, he told reporters.

The Bank’s Monetary Policy Committee voted for maintaining interest rates, but there was dissent among the nine members, with one person voting for an immediate rise.

A single dissenter, Ian McCafferty, voted to raise rates to 0.75 per cent, in the first split vote since the end of 2014. The pound strengthened as Bank of England policy makers met to vote on interest rates before they release an unprecedented flow of central-bank data on what’s being dubbed “Super Thursday”.

But Mr Carney has predicted that the time for an interest rate hike is moving closer.

Traders pared bets on the BoE raising interest rates, with the implied yield on the short-sterling contract maturing in December falling 4 basis points to 0.71%. Bank funding costs are going to play a role, as ever, as lenders weigh up how much interest they’re going to charge on new fixed-rate mortgages and floating-rate mortgages. “I’m now a seller of euro-sterling, but was hoping for rather more impetus for that trade from the BOE events just gone”.

But a recovery in the oil price has been held back after Iran agreed a deal with the US on its nuclear programme which should see sanctions lifted and the door opened for more crude to start pumping into the world’s supplies. “The falls in energy prices of the past few months will continue to bear down on inflation at least until the middle of next year”.

While the sustainability of the spending has been questioned in the past, it is now being supported by strong wage growth which last month hit 3.2%. Very rapid gains in employment are giving way to some pay rises after several long years of negative real wage growth.

In recent weeks, traders have become increasingly bullish about the timing of an increase in the bank’s 0.5 per cent main rate, with forward contracts based on the Sterling Overnight Index Average (Sonia) implying a move next May.

It’s the job of the MPC to look beyond “one-off” effects in the inflation data and identify underlying trends but the key line in the minutes was this: “It appeared that the increase in inflation over the following year would be more gradual than had previously been supposed”.

Speaking to the press, Carney says: ‘The most striking development in the UK in the past year has been the fall in CPI inflation, which edged back down to zero in June.

Chris Williamson, chief economist at Markit, said on Thursday: “Today’s meeting represents a more doveish than expected policy stance from the MPC as a whole, effectively removing the risk of rates rising in 2015”.