Interest rates to stay at record low of 0.5%, Bank of England says

Inflation is expected to return to the 2 per cent target by 2018

The 9 person MPC voted 8 to 1 to keep rates fixed at 0.5 per cent (PA)

Interest rates look set to stay on hold until well into 2017 after the Bank of England today unveiled a set of forecasts showing the global economic slowdown imposing a major drag on the UK over the coming years.

In its latest quarterly inflation report the Bank slashed its inflation estimate for the end of 2016 to just 1.1pc, down from 1.5pc in August.

Moreover, the new Threadneedle Street forecast was predicated on a collapse in market expectations of the pace of rate rises since the summer, meaning that without this stimulus the Bank's inflation forecast would have fallen even more drastically.

The market turmoil over the summer and the sharp deceleration of the global economy had prompted traders to push back their forecast of the first 0.25pc increase in UK rates until the first half of 2017 at the end of last month. In August markets were anticipating rates lift-off in the second half of 2016.

The Bank's latest forecasts, which show inflation finally returning to the 2pc target by 2018, suggest it is comfortable with the latest market assumption on the "more gradual" rate of rate rises.

In a further dovish hint the rate-setting Monetary Policy Committee said there remain "downside risks to this outlook, including that of a more abrupt slowdown in emerging economies".

The 9 person MPC voted 8 to 1 to keep rates fixed at 0.5pc, with Ian McCafferty again the only member pressing for an immediate 0.25pc increase in the cost of borrowing.

However, the minutes of the MPC's meeting also related " a wide spread of views among members about the outlook for activity and inflation" suggesting some members could yet join Mr McCafferty in the coming months.

The MPC also stressed that "developments might easily turn out differently than assumed, with implications for the global outlook for growth and inflation".

The Bank shaved its 2016 GDP growth forecast to 2.7pc, down from 2.8pc previously. It added that it expects the growth rate for the third quarter eventually to revised up to 0.6pc from 0.5pc. The Bank also expects fourth quarter growth to be 0.6pc.

The Bank said that the amount of "slack" in the economy remains around 0.5pc of GDP.

Consumer price inflation stood at -0.1pc in September. The MPC said it is unlikely to rise above 1pc until the second half of next year due to weak global commodity prices and import costs as well as the dampening effect of sterling.