Bank of England holds interest rates

The BoE’s Inflation Report, showed officials expect annual inflation to tick back up to the 2% target by the third quarter of 2017 if interest rates rise in line with market expectations.

Howard Archer, chief UK and European economist at IHS Global Insight, said the chances of an interest rate rise this year had “seemingly receded markedly”.

“CPI inflation fell back to zero in June”. Symmetric targets help to ensure that inflation expectations remain anchored and that monetary policy can play its role fully. It also comes in spite of a 3.5% rise in the value of the pound since its last set of major forecasts in May. But the overall tone of the minutes and the bank’s quarterly economic forecasts suggested the central bank was focused on the potential for the surge in sterling to keep a lid on inflation.

We have been disappointed by the time it has taken for productivity to rise. Another key indicator of future inflation is the rate of core inflation, this is the measure of prices in the economy with energy and housing costs stripped out.

David Meier, senior economist at Julius Baer, said these conflicts will end up pushing a rate rise later, to next year: “Given robust growth but some renewed downside risks on inflation, we maintain our call for the first rate hike on February 2016″.

“The exact timing of the first move can not be predicted in advance; it will be the product of economic developments and prospects”, he said. “In short, it will be data dependent”, Carney said in a news conference.

The news comes on what has been dubbed “Super Thursday” as for the first time the minutes of the MPC’s meeting were published immediately after the decision.

“Super Thursday” didn’t quite live up to the grand billing. Carney said the thinking about such a move, which will end more than six years of record-low rates, will come into “sharper relief” around the turn of the year.

The inflation report appeared to endorse market expectations that rates will not rise to 0.75 per cent until next year – possibly in May. It’s a classic sign of a tightening labour market, which should produce some inflation.

From a consumer perspective, it’s pertinent to note how banks adjust deposit rates whenever policy rates are revised.

On the one hand, moving earlier would allow a more gradual path for interest rates. It is therefore likely that I will need to write further open letters to you in coming months. Most thought at least both Ian McCafferty and Martin Weale, the most hawkish members of the committee, would break ranks and vote for an increase in interest rates.

But he said any rate rise would be timed to prevent inflation breaching the 2% target. Policymakers voted 8-1 to keep interest rates the same.

One member of the nine-strong committee voted for an immediate hike in the first split vote of 2015 but it failed to impact on investors – as a wider dissent had been expected.

Rate hike timing closer than perceived in the previous QIR in May.

However, going forward, CII said it expects the spotlight to shift towards growth and the RBI to resume monetary easing in its next monetary policy when there would hopefully be much more clarity about the inflation trajectory, the normalcy of monsoons and the possible US Federal Reserve actions.