Bank of England hold interest rate with 8-1 MPC vote as growth forecast upgraded

The Bank of England has held interest rates at 0.5%, with minutes of the Monetary Policy Committee meeting revealing a vote of 8-1 in favour of this decision, as the bank upped its growth expectation and cut its inflation forecasts.

As part of the first 'Super Thursday' of simultaneous releases, which will also see governor Mark Carney will hold a press conference at 1245 BST, the central bank also upped its 2015 growth forecasts to 2.8% and cut its inflation projection in half to 0.3% from 0.6%.

Economists said the chances of an interest rate hike before the end of 2015 had now receded.

The only member of the committee to break ranks on rate lift-off was Ian McCafferty, while commentators had expected a 7-2 split.

As well as holding rates steady for the 77th month in a row, the BoE also decided unanimously to keep the size of its asset purchase programme at £375bn.

The MPC decision came in light of CPI inflation falling back to zero in June, reflecting unusually low contributions from energy, food, and other imported goods prices.

Inflation expectations were lowered due to falling oil prices and the prolonged strength of sterling and are expected to oscillate around that level for the next few months before rising on a more sustained basis towards the middle of 2016.

The minutes emphasised that “some members” saw upside risks to the inflation forecast.

Market reaction

Markets took a bearish view, with sterling weakening markedly and gilts falling sharply.

The BoE's Super Thursday output suggested an interest rate rise was "still not imminent", said Sam Tombs of Capital Economics.

"It would not be surprising if one or two more MPC members joined Ian McCafferty in the coming months," Tombs added, reiterating his own prediction of a second-quarter 2016 first rate rise.

"But we doubt that rates will rise until the Governor changes his view – note that interest rates have never risen without the Governor voting to hike. And in his speech last month, Mark Carney stated that he wanted to see core inflation and growth in unit wage costs pick up before voting to raise rates. The recent strengthening of the pound and rebound in productivity suggest that those pick-ups are unlikely to be seen in the data for some time."

Howard Archer of IHS Global Insight said the chances of an interest rate hike before the end of 2015 "have seemingly receded markedly; indeed, it looks more questionable as to whether the Bank of England will act early on in 2016".

Archer added that it appeared the recent falling back in oil prices and sterling’s strength had reduced the MPC’s perceived need to tighten monetary policy in the near term.

"Also significantly, the Bank of England now seems more confident overall that UK productivity is finally improving, which largely counters the recent upward surprises on earnings growth."