Bank expected to hold rates at 0.5%

Interest rates are expected to remain on hold tomorrow as low inflation and world economic concerns mean the first hike remains a distant prospect.

Expectations of a hike have been dampened with rates likely to remain at 0.5% until the end of next year
Expectations of a hike have been dampened with rates likely to remain at 0.5% until the end of next year

Plunging oil prices add to the factors easing any pressure on Bank of England rate-setters to vote for an increase, though a minority are already pressing for a rise as the recovery produces a jobs boom.

The cost of borrowing has been held at 0.5% since the height of the downturn in March 2009 and despite the recovery is expected to remain at that level until the second half of next year.

That would mean rates being at the historic low for more than six years - a relief for borrowers but meaning more pain for savers.

Bank of England governor Mark Carney has said the recovery means the time for a rate hike is nearing and affirmed to MPs last week that the next move would be an increase - despite the global headwinds buffeting the economy.

However he also said the combination of low inflation with pressures including European stagnation and Japan's recession meant that when rates do begin to be increased it is likely to be slower than previously thought.

A plunge in oil prices, together with the supermarket price war, has helped keep the rise in the cost of living down.

The Consumer Price Index (CPI) measure of inflation was 1.3% in October and the Bank expects it to fall below 1% over coming months - which would prompt Mr Carney to have to write a letter of explanation to the Chancellor.

However, members of the Bank's nine-member Monetary Policy Committee (MPC) are becoming increasingly concerned about the potential upward path of inflation further into the future should interest rates remain at their current level.

Two members of the committee have already started voting for a hike, arguing that rate-setters should "look through" temporary effects including raw materials and the strength of the pound.

Minutes of the latest MPC meeting last month revealed that even among the majority supporting the status quo there was now "a material spread of views on the balance of risks to the outlook" as the record numbers in jobs threatens to feed through to CPI.

Samuel Tombs of Capital Economics said: "While the two members already voting to raise interest rates may struggle to win over new recruits at December's meeting, it may not be long before they have more company."

Recent economic signs have been less buoyant than earlier in the year, and rate-setters will be anxious about contemplating any interest rate rise at a time when the recovery looks under threat.

Latest UK GDP figures showed that growth, while still strong, was being propped up by consumer spending with business investment and foreign trade worsening.

But survey data this week suggested that fears of a sharp slowdown may have been overplayed, suggesting that growth would ease back only slightly to 0.6% in the fourth quarter compared to 0.7% in the previous three-month period.

The CIPS/Markit purchasing managers' index figures indicated that the dominant services sector had bounced back in November after its expansion slowed to a 17-month low in October.

Meanwhile, manufacturing picked up to a four-month high in November - though export orders weakened - while the construction sector saw its slowest growth for 13 months.

Elsewhere, Bank of England figures showing another dip in the number of home buyer mortgages pointed to the continuing housing market slowdown.

James Knightley of ING Bank said despite the pick-up in economic data, subdued inflation pressures amid plunging petrol prices and the supermarket price war suggested little imminent pressure for the Bank of England to raise interest rates.

However, Alan Clarke of Scotiabank said it suggested that waiting another year for a hike looked "a little excessive".