Bank to cut forecast on growth and inflation

Its quarterly inflation report today is likely to cement the view that interest rates will remain on hold at 0.5 per cent until well into 2015, after the General Election in the spring.

Earlier this year, a hike had been expected as soon as this month but stagnating wages and low inflation, added to the effect of weakness in the eurozone, have persuaded the Bank to stay its hand.

The prospect of interest rate rises has been further eased by the picture on inflation, which is at a five-year low of 1.2 per cent.

Tumbling oil prices and a supermarket price war have prompted some speculation that it could fall below one per cent by the end of the year, which would force the Bank’s Governor Mark Carney to write a letter of explanation to the Chancellor.

While low inflation eases the strain on households, policy makers would be concerned were it to fall too much. Ultra-low inflation in the eurozone has provoked emergency stimulus measures to guard against the threat of a damaging deflationary spiral.

Struggling wage growth has also weighed against the prospects of an interest rate hike – with policy makers saying they want to see signs of real terms improvement before interest rates go up.

Pay increases have been lagging behind inflation for six years with latest figures showing a rate of 0.7 per cent. Latest labour market data, published at the same time as the inflation report, will show whether there has been any improvement.

Interest rates have been held at 0.5 per cent for more than five years after they were slashed in 2009 to help nurse the recession-hit economy back to health. But two members of the rate-setting Monetary Policy Committee have dissented from the majority view of the nine-member body by voting for a hike at the last three meetings.