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Doves dominate as Bank of England holds rates

Investors hoping the Bank of England may follow the U.S. Federal Reserve in an expected interest rate rise this year look set to be disappointed after the U.K. central bank voted 8-1 to hold rates

The Bank's Monetary Policy Committee (MPC) voted to keep interest rates at their all-time low of 0.5 percent Thursday, as expected. The MPC also implied those betting on a first-quarter rate rise in 2016 may be disappointed in its minutes, by suggesting current market pricing (for a May rise) is "consistent with an improvement in sentiment".

Ian McCafferty was the only member who voted to raise rates, by 0.25 percent. This is likely to surprise BoE watchers, as he had been expected to be joined by at least one more hawk, probably Martin Weale.

The more dovish-than-expected tone of the report suggests that the Bank's first interest rate rise will come later than previously forecast. Many investors had factored in a rise in February next year.

Following the rate decision, sterling fell sharply against the dollar, off 0.7 percent on the day at $1.54.

Rather than be staggered over a few weeks, the Bank's interest rate decision, the MPC minutes and its quarterly analysis of the U.K.'s economy have all been released at the same time in what has been dubbed as "Super Thursday". The data dump is part of what Governor Mark Carney hopes will be a new era of transparency at the bank.

Drag on inflation

According to the Inflation report, the U.K.'s rate will not reach the Bank's 2 percent target again until the third quarter of 2017.,

Low oil, food and imported goods prices account for much of the drag on inflation, according to Carney.

The governor continued his emphasis on caution and "gradual" rate rises, or a "gently rising path" as it was called in the minutes, as the U.K. tries to return to normality after years of extraordinary financial measures following the credit crisis. He still expects the U.K. economy to grow slowly this year.

The potential for further deflation has not been ruled out. While it is not the Bank's central case, its margin for error includes the prospect of further negative inflation prints in coming months. Lower-than-expected oil prices have increased this prospect.

The employment market continued to puzzle the MPC, with mixed signals including a falloff in employment growth, but, in contrast, more demand for new employees. Overall slack in the economy was still around 0.5 percent.

Greece and China were the main sources of international concern for the committee, although fears about a disorderly Greek exit from the euro zone had abated after the partial resolution of its issues with creditors.

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