February 5, 2015 / 12:04 PM / 5 years ago

Bank of England keeps rates on hold, readies new signal on outlook

LONDON (Reuters) - The Bank of England kept interest rates at a record low once again on Thursday, leaving investors waiting another week for an update on when they should expect borrowing costs to rise.

The Bank of England is seen, with a statue in the foreground, in the City of London December 16, 2014. REUTERS/Toby Melville

Financial markets are betting on a first rate hike only in the middle of 2016, more than seven years after Bank Rate was cut to 0.5 percent in the depths of the financial crisis.

Some economists suggest that forecast may have been pushed too far into the future.

Britain’s plunging inflation rate and the likelihood that it will soon turn negative prompted two dissident BoE rate-setters to give up calling for an immediate rate hike last month.

Last week, yields on 10-year government debt - a benchmark for lending - touched a record low.

In a brief statement after a two-day monthly meeting, the Bank’s Monetary Policy Committee said it was keeping Bank Rate at 0.5 percent and the stockpile of government bonds it bought as additional stimulus after the crisis at 375 billion pounds.

It made no further comment. Markets are watching for a quarterly Inflation Report, due to be published next Thursday, to get a sense of how relaxed the Bank is about keeping in place the stimulus of rock-bottom rates.

The debate at the BoE contrasts with that at many other central banks around the world which have cut rates or taken other stimulus measures in recent weeks to offset fears about slowing growth and deflation.

The global plunge in oil prices has encouraged Britain’s free-spending consumers to turn their savings at the fuel pumps into more shopping on other things, offsetting the drag on exports that a stagnant euro zone has generated.

Wages have started to grow a bit faster, and there have been fresh signs of strength in Britain’s economy this week including better-than-expected readings of the services and manufacturing sectors and hints that a slowdown in the housing market may have reached a bottom.

“The amount of stimulus now in the pipeline means that rate-setters cannot say they have no plans to ever raise rates again,” Berenberg bank economist Rob Wood said. “In our view, the market has gone too far in pushing back the timing of rate hikes.”

He said markets could be wrong-footed next week if the BoE raises its medium-term inflation forecast even as it responds to tumbling oil prices by cutting its short-term view.

In November, the Bank of England forecast that inflation would average 1 percent in the first three months of 2015, rising to 1.4 percent in the fourth quarter of 2015 and 1.8 percent by late 2016.

Since those forecasts were made, oil prices have fallen further and Governor Mark Carney has said price growth is likely to turn negative in the coming months.

Michael Saunders, an economist at Citi, said policymakers would be wary of pushing up the value of the pound sharply by suggesting a sooner-than-expected rate hike.

“Nevertheless, the MPC may want to signal that markets have pushed the timing of the first UK rate hike too far into the future,” he said in a note to clients, predicting a first increase in borrowing costs in 2015 or early 2016.

Writing by William Schomberg; additional reporting by David Milliken; editing by John Stonestreet

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