Dovish BoE dampens rate hike expectations

U.K. interest rates are now likely to remain lower for even longer, with the middle of 2017 a real prospect for what would be the first rise in close to a decade.

The Bank of England's Monetary Policy Committee (MPC), in its regular ruling on interest rates and quarterly inflation report, sounded an unexpectedly dovish note on Thursday.

The committee was split 8-1, with Ian McCafferty the only member voting to raise rates. Sterling crunched lower on the news, hitting 1.528 against the dollar after trading near 1.540. The yield on 10-year government bonds also fell, reaching 1.960 percent from yesterday's close of 1.995 percent.

Mark Carney, the Governor of the Bank, has previously identified "the turn of the year" as the likely point at which an interest rise would "come into sharper relief". If it looks as though this could be a whole year removed, his reputation as an "unreliable boyfriend" (as one U.K. politician famously labelled him) might be reinforced. The governor managed the market's expectations, however, in comments made at a press conference following the announcement.


Bank of England Governor Mark Carney
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Bank of England Governor Mark Carney

"This guidance is an expectation, not a promise," Carney says of the prospect of low rates until 2017.

The second-ever of the Bank's so-called Super Thursdays (where the interest rate decision and inflation report are released at the same time) will give fuel to those hoping for a later rate rise.

The path markets are expecting for interest rates "now embodies an even more gradual pace of tightening than at the time of the previous Report", according to the MPC.

Weakening prospects for global growth, particularly in emerging markets, and lower expectations for inflation in the short-term as oil and commodities prices stayed low, are large factors in its decision. Inflation is now expected to stay below 1 percent until the second half of 2016, later than previously thought, as sterling energy prices are forecast to be 15 percent lower than Bank projections from February this year. However, inflation is expected to start rising more quickly in the medium term than previously forecast by the bank, and hit 2.1 per cent by the last quarter of 2017.

As the vast majority of the MPC want to wait for inflation to rise higher before they proceed, this should dampen interest rate expectations.

The Bank's U.K. growth forecasts have been lowered slightly for 2015, from 2.8 percent to 2.7 percent, and 2016, from 2.6 to 2.5 percent.

Its asset purchases, another tool aimed at restoring the flow of credit in the U.K. post-credit crisis, will be held at £375 billion until the base interest rate is around 2 percent again, the MPC said in its most forward-looking statement ever on the huge monetary easing program.

If the MPC held off raising rates until 2017, it would be the longest time without a U.K. interest rate rise since the Second World War and the post-war period.

This makes it more likely that the U.S. Federal Reserve will be the first major Western central bank to make a move on interest rates after years of ultra-low borrowing costs. Fed Chair Janet Yellen reminded markets Wednesday night that a December hike was still a "live possibility" for the central bank.