Bank of England holds rates as doves grow louder

Bank Of England Building

The Bank of England's rate-setting committee voted 8-1 to keep interest rates at their record low for another month in October, as a rate rise before mid-2016 looks increasingly less likely.

With some disappointing data on the U.K. economy, the continuing threat of low inflation or deflation, and market turmoil elsewhere continuing, there was little impetus for the Bank's Monetary Policy Committee to move on interest rates for the first time in six and a half years.

Ian McCafferty, who for months has been the committee's most hawkish member, remained the sole member of the committee voting for an increase in interest rates.

Sub-1 percent inflation, which is below the target set for the MPC, is likely to be a feature of the U.K. economy until at least spring 2016, the committee admitted. CPI inflation is now forecast to stay close to zero for the rest of the year by the committee. This is likely to delay the moment it first raises interest rates.

Economists and stock market traders increasingly believe that the bank will hold rates for longer than previously thought, especially since the U.S. Federal Reserve delayed a once much-anticipated rate rise in September. Bank of America Merrill Lynch economists this week put off their forecast for a U.K. rate rise until May 2016, instead of their previous prediction of February.

Some MPC members cited evidence that inflation isresponding more quickly to interest rate changes than previously thought.

The U.K. is also still suffering from a worse than usual shortage in skills, which may be limiting the recovery in jobs and wages,according to the committee.

Outside the U.K., the stock market turmoil of the summer and September raised eyebrows. Even without these problems, the recovery from the credit crisis in the West could be slower than previously thought, the MPC warned.

"It was possible that the sluggishness of productivity and output growth in the advanced economies, reflecting the legacy of the crisis, would be somewhat more persistent than assumed," the MPC warned in a statement.

Concerns about weakness in emerging market economies were also mentioned.

Managing the return to normal monetary policy, after extraordinarily low interest rates and money printing by many central banks since the credit crisis of 2008, is the most difficult task facing major central banks today.

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