The Bank of England cut its growth forecasts on Thursday and the only policymaker who had been pushing for a rate hike reversed his position, suggesting rates will stay on hold for the foreseeable future.
BoE Governor Mark Carney said officials still expected the next move in interest rates to be upwards, but echoed downbeat comments from central banks around the globe, warning that global growth would be modest as emerging economies struggled.
Highlighting risks from China's economic rebalancing and the financial market turmoil, he said risks to Britain were rising even if domestic demand remained strong.
"All of these developments pose downside risks to growth in the United Kingdom via trade, financial and confidence channels," Carney told a news conference.
"The outlook for trade is particularly challenging."
The Bank said its Monetary Policy Committee voted 9-0 to keep rates on hold at a record-low 0.5 percent, where they have been for almost seven years. MPC member Ian McCafferty, who had voted for a rate rise since August, unexpectedly fell into line this week, citing a temporarily weaker outlook for wages.
Central banks around the globe have pared back growth and inflation expectations, openly discussing the need for more accommodation and erasing hopes that policy normalization could start later this year.
The Bank of Japan last week cut rates into negative territory, the ECB hinted at a further cut in March and dovish comments from New York Fed Governor William Dudley overnight suggested that no U.S. rate hike could come at all this year.
Britain has stood out from Europe's economic weakness with relatively healthy growth, little spare capacity and a jobless rate near the long term equilibrium, for a while raising expectations that it would soon follow the Fed's December hike.
"NEXT MOVE IS UP"
Global market turmoil has since dashed those prospects but Carney said the next move was still more likely up than down. Moreover he said that if the BoE followed recent market bets for a rate hike only late next year, it would end up slightly overshooting its 2 percent inflation target.
"We'll do the right thing at the right time on rates," he said. "More likely than not, the next move is up."
Inflation Press conference February 2016
Since the BoE finalised its forecasts a few days ago, markets have pushed out bets on a first rate rise until mid-2018. There was little change in pricing after Carney spoke.
Economists, however, still mostly expect a much earlier move and RBC's Sam Hill said Carney's comments strengthened his conviction that rates would start to rise in around a year.
"In the near-term the MPC is more circumspect on the current vote but ... a hike is being signaled as necessary some time before markets currently imply," he said.
Part of the reason markets appeared only to expect rates to rise in 2018 was because they were partly factoring in the risk of a rate cut before then, something Hill noted that Carney had dismissed.
SLUGGISH WAGE GROWTH
The BoE forecast Britain's economy would grow 2.2 percent this year and 2.3 percent in 2017, down from forecasts of 2.5 percent and 2.6 percent in November and barely changed from 2015, when growth disappointed expectations.
Consumer price inflation is forecast to stay below 1 percent through 2016 -- longer than previously thought -- but then is forecast to rise to just over 2 percent in two years' time, similar to the last set of forecasts.
The BoE also cut its wage forecasts, predicting wage growth of 3 percent -- a level officials had previously identified as supporting a rate rise -- only at the end of 2016.
Two weeks ago, Carney said he would only back a rate rise once growth was faster than average, wages had picked up and underlying inflation was nearer 2 percent.
Carney added that sterling's recent fall, the resilience of the financial system and solid growth in both household and corporate consumption supported the British economy, indicating the domestic economy could withstand increased global stress.
Sterling has weakened by more than 3 percent over the past three months. The BoE said this reflected concerns about global growth, lower interest rate expectations and possibly uncertainty about Britain's referendum on leaving the European Union, which is likely to take place in the middle of this year
Savers have lost out on an estimated £160 billion collectively due to the impact of years of rock bottom interest rates on their cash deposits, according to analysis.
Financial services firm Hargreaves Lansdown said the loss equates to £6,000 per household in the UK.
It calculated that lower interest payments have cost cash savers £160 billion in total, compared with the returns they were receiving before the financial crisis.
The firm said the interest rate that people can expect to get on an instant access deposit account, for example, has fallen from 3% in September 2008 to just 0.8% now.
Laith Khalaf, a senior analyst at Hargreaves Lansdown, said: “Cash has been trashed.”
He continued: “Indeed, markets are now pricing in a higher chance of an interest rate cut than a rise this year.
“At the moment UK monetary policy is being held in check by two opposing forces; low inflation on the one hand, and a growing economy on the other. Should the economy falter, the scales will start to tip towards loosening monetary policy once again, either through an interest rate cut, or more quantitative easing.”
The estimated loss to savers is based on Hargreaves Lansdown’s analysis of Bank of England figures, comparing the actual interest paid on deposits from September 2008 to January 2016 with what those payments could have been, had interest rates remained at their 2008 level.
The analysis assumes that the amount of money held in deposits was the same as occurred – but it said that in reality, if interest rates had been higher, more people could have been encouraged to keep money in savings.
Are you paying your high street estate agent to much to money ? Take the Challenge @onthemarketblog
Bank of England's Carney says no timetable for rate rise , interest rates , buy-to-let
European Union reform , primeminster David Cameron
Three Truths about Finance - Governor of BoE - Mark Carney
buy-to-let Millionaires Judith & Fergus Wilson sell remaining property portfolio for £250 m
Britain Inflation and housing: joined at the hip
How low can you go ? speech by Andy Haldane BoE Chief Economist
UK Property Markets Bank Of England Financial Stability Report December 2015
Bank of England volatility has extinguished any prospect of a rate rise in the near-future.on track for seven years of record low interest rates as global markets turmoil
Royal Bank of Scotland to settle on US mortgages within Weeks