Bank of England Keeps Rates Steady, Sees Greater Risks


Bank of England policymakers voted 8-1 to keep rates at a record-low 0.5 percent this month and judged it was too soon to decide if turmoil in markets sparked by China will affect Britain much.

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Ian McCafferty, one of the nine members of the Monetary Policy Committee, voted to increase rates to 0.75 percent but the majority of policymakers appeared in no rush to raise rates, according to minutes released on Thursday.

The central bank said it expected Britain's economy to maintain healthy growth. Some rate-setters saw a risk of inflation rising more quickly than forecast although better productivity was offsetting the effect of higher wages.

"Although the downside risks emanating from overseas had risen, it would be premature to draw strong inferences from this month's events for the likely path of activity in the United Kingdom," the MPC said in minutes of its monthly policy meeting.

The BoE's decision comes after a month of sharp falls on global stock markets, driven by financial turmoil in China, and some more recent signs of weakness in Britain's hitherto robust economic recovery.

There is also a high degree of uncertainty about whether the U.S. Federal Reserve will decide next week to tighten policy for the first time since the 2007-09 financial crisis, which is likely to have knock-on effects across global financial markets.

Figures on Wednesday showed an unexpected, sharp fall in British industrial output -- partly due to faltering overseas demand -- and broader industrial surveys have pointed to a slowdown in growth in the third quarter to around 0.5 percent.

The central bank's staff trimmed their forecast for third-quarter growth to 0.6 percent from 0.7 percent.

This is still roughly in line with Britain's historic average rate of growth, and the MPC's members had a "range of views" on inflation. Some thought it could overshoot its 2 percent target in the medium term, suggesting that they would not take much more persuading before voting for a rate hike.

Inflation is currently only just above zero -- and far below its 2 percent target -- and the BoE said it was likely to stay close to zero for the next few months, with volatile oil prices adding uncertainty to the outlook.

Economists polled by Reuters on Wednesday forecast that the central bank would start to raise interest rates in the first quarter of 2016.

BoE Governor Mark Carney said last month that the decision on when to raise rates was likely to come into "sharper relief" around the turn of the year, and that China's problems did not appear poised to have a big impact on Britain.

This week's policy meeting was the first for new MPC member Gertjan Vlieghe, a former economist at hedge fund Brevan Howard who replaced the generally dovish finance professor David Miles, and on this occasion voted with the majority.

(Reporting by David Milliken and William Schomberg)