Central Banks

Sixth year after historic UK rate cut, what next?

BoE keeps rates on hold: Reaction

The Bank of England (BoE) left monetary policy steady Thursday, barely causing a stir in markets -- a stark contrast to six years ago when it cut rates to a record low amid a global financial crisis.

The central bank kept the U.K.'s benchmark interest rate at a record low of 0.5 percent and the total size of its bond portfolio at £375 billion ($571 billion).

Much has changed since the BoE's historic rate cut six years ago, to the day. Here are some of the reasons why economists don't expect another year to pass with no monetary policy change.

Brighter outlook:

The BoE expects the economy will grow by 2.9 percent this year -- its fastest growth in nearly a decade – thanks in part to a slide in oil prices that gives back money to consumers and businesses.

"A lot has changed in the British economy since the firestorm unleashed in 2008. The U.K. has slowly but surely been consigning the after effects of that financial crisis to history," Berenberg Chief U.K. Economist Robert Wood said in a note.

Bank of England Governor Mark Carney
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"Absent oil's price fall a rate hike this year would probably have been odds on. As it is, we look for the first hike in February 2016."

The U.K. economy expanded 2.6 percent in 2014 – the fastest growth in seven years.

Read More Has the economy already won the UK election?

Deflation risk:

Inflation in the U.K fell to just 0.3 in January, its lowest level since records began in 1989, and BoE Governor Mark Carney has warned inflation could fall below zero in coming months.

Read MoreUK inflation hits lowest level since records began

The central bank has said that if deflation becomes entrenched, rates could be cut again, although most economists expect rates to eventually be moved up rather than down.

The BoE also argued that a short bout of deflation would be good for the economy, since a fall in prices would boost consumers' disposable income. Household spending, which accounts for nearly two-thirds of economic expenditure, rose 2.2 percent in yearly terms in the last quarter of 2014 – its fastest pace since early 2008.

"The U.K. is among the more resilient in terms of deflation risk," said Stephen Lewis, chief economist at ADM Investor Services. "They (policy makers) have talked about cutting rates but this is to show they have an open mind. I think late this year or early next year, rates will start going up."

Falling unemployment:

Generally improving labor market conditions add to the picture of a brighter economic outlook. Unemployment has fallen from a peak near 8.5 percent in 2012 to 5.7 percent, not far off the 5.4 percent average seen in 2007.

"The key point is that if the unemployment rate keeps falling as fast as it has over the past two years, then it would be below 5 percent by the end of the year," Berenberg's Wood said. "It is (a story) of an economy moving towards a position where higher rates will be needed. Not now, or indeed probably for much of this year. But the economy is getting there."

There are risks on the horizon, however, such as weakness in the euro zone economy and repercussions from a debate about the U.K.'s membership of the European Union to name just a few.

Either way, the backdrop for U.K. monetary policy is changing and the next year could bring with it a new anniversary -- that of a rate hike.

"We expect the first BoE rate hike in November 2015," David Tinsley, an economist at UBS said in a note. "The pace of U.K. economic growth remains solid, though some cooling is evident."