Bank of England signals interest rate rise this year is unlikely

Ian McCafferty became the first member of the committee to vote for a rate rise since he called for one late last year. He highlighted the threat that growing demand and pressure on wages would stoke inflation.

Martin Weale and David Miles had been expected to vote with Mr McCafferty for an increase.

However, both voted with the six other members of the MPC to keep rates at 0.5 per cent.

The vote reflects the dominant view that factors such as the strength of the pound, the fall in the oil price and spare capacity in the economy will keep a lid on prices for some time.

The decision combined with the contents of the bank’s latest inflation report left traders feeling a rate rise is likely some way off.

Sterling fell to its lowest in nearly two weeks against the dollar, while British government bonds rallied.

The minutes were published with the bank’s latest forecast for the UK economy, which it now expects to grow by 2.8 per cent this year, compared with 2.5 per cent in May. The growth projections for the following years are largely unchanged.

The increase in the forecast follows signs the economic recovery is getting more firmly established.

Rates have been held at 0.5 per cent since 2009 to help promote a recovery.

The Governor of the Bank of England, Mark Carney, told reporters: "As the UK expansion progresses speculation about the precise timing of the first move in bank rate is increasing. This is understandable and it's another welcome sign of an economy that is returning to normal.”

He added: "The likely timing of the first bank rate increase is drawing closer.”

However, Chris Williamson at Market Economics said the minutes reflected a more dovish than expected policy stance from the MPC as a whole, effectively removing the risk of rates rising in 2015.

Howard Archer, UK economist at IHS Global Insight said:”The chances of an interest rate hike before the end of 2015 have seemingly receded markedly.”

Mr Archer now believes the bank will most likely raise the rate to 0.75 per cent in February 2016.

Mr Carney’s comments at the press conference will reinforce the impression the rate will only increase relatively slowly over time.

The bank said it expected Consumer Price Index inflation to be back to its two percent target in two years' time, in line with its previous forecast made in May.

However, Mr Carney noted: "The most striking development in the UK over the past year has been the fall in CPI inflation, which edged back down to zero percent in June,"

The recent renewed fall in the oil price and cuts in energy costs will help keep downward pressure on CPI inflation.

The bank said the impact of the strong pound on import prices will continue to push down on inflation for some time to come.

The risks to global growth are judged to be skewed moderately to the downside, reflecting risk to activity in the euro area and China.

Conversely, the bank said private domestic demand is robust and expected to remain so.

However, labour costs have not risen as fast as may have been expected given the strength of the job market.

Mr Carney was pleased to note recent data suggest productivity has increased. Such an increase could mute inflation.

The minutes of the MPC meeting state: “All Committee members agreed that the central message of the February 2014 Inflation Report guidance remained relevant: given the likely persistence of headwinds weighing on the economy, when Bank Rate did begin to rise, it was expected to do so more gradually than in previous cycles.

“Moreover, the persistence of those headwinds, together with the legacy of the financial crisis, meant that Bank Rate was expected to remain below average historical levels for some time to come.”

In a departure from the norm, the rate decision was published with the latest inflation report and economic forecast on what was billed as “Super Thursday”. The releases are usually issued weeks apart.