By David Milliken and William Schomberg
LONDON (Reuters) - The Bank of England made no move towards an early interest rate rise on Thursday, saying Britain's near-zero inflation would pick up only slowly, even if borrowing costs stay on hold throughout next year.
Governor Mark Carney, who had previously said a decision on whether to raise rates would come into sharper focus around the end of this year, was vaguer this time, saying simply that the BoE would move when the time was right.
Sterling fell sharply after the BoE's announcement, which surprised investors who had expected a clearer signal that a rate hike was approaching, and contrasted with the tone of the U.S. Federal Reserve. Its chair Janet Yellen said on Wednesday that a U.S. rate rise was a prospect for December.
Only one BoE policymaker, Ian McCafferty, voted to raise interest rates this month, as most economists had expected. The other Monetary Policy Committee members opted to keep them at a record-low 0.5 percent, where they have been since March 2009.
Britain grew faster than any other big developed nation last year and is still on course to be around the top of the pack in 2015, even as the BoE trimmed its near-term growth forecasts.
At the same time, inflation remains stuck below zero, pushed down by a plunge in prices of energy and other imported goods.
The BoE said that even though Britain's domestic economy was strong, risks from emerging markets had grown and lower prices for fuel, food and other imported goods would keep inflation below 1 percent until at least the middle of next year.
Carney, asked by a reporter if he regretted saying a rate decision would become clearer around the turn of the year, said: "Absolutely not."
He said the prospect of a rate increase was still growing and surveys showed about two-thirds of households expect that rates will start to go up at some point over the next 12 months.
"Given forecasts, that is a reasonable expectation," he said. "We'll take our decisions at the right time."
In another sign that it was relaxed about keeping its stimulus for the economy in place, the Bank said it would keep on reinvesting the proceeds from the 375 billion pounds ($571 billion) of government bonds that it bought during the crisis until it had raised interest rates to around 2 percent.
That might not happen until the end of the decade, according to the Bank's latest forecasts.
NOTHING FOR NOW
The BoE message surprised many investors who had started to price in a rate move earlier than in recent weeks.
Sterling fell more than a cent against the dollar and government bond yields dropped sharply.
"The MPC is not at all clear on when rates should begin to rise. But that point is unlikely to be over the next few months," Investec economist Philip Shaw said.
Financial markets have been betting on a rate hike further out than most economists, and in recent days most money was on a first rate increase at the end of 2016.
The BoE used recent market forecasts of no move until 2017 as its working assumption for its new outlook. It predicted that inflation, currently below zero, would nudge above its 2 percent target in two years on a so-called "modal" projection basis.
This was only a fraction higher than its August forecast, which had been based on rates rising in the middle of next year.
But Carney also pointed to the BoE's forecast that inflation in three years' time would be 2.2 percent, which he said was the biggest overshoot that it had forecast in a decade. Some economists said this gave the BoE a way to quickly change tack and raise rates if needed.
Economists had previously said they expected a first interest rate rise by the BoE in the second quarter of 2016, according to the average forecast in a Reuters poll.
The slow pick-up in inflation comes despite relatively robust growth forecasts.
Growth, as measured on a modal basis, is seen at 2.7 percent this year, 2.5 percent in 2016 and 2.7 percent in 2017, only a whisker weaker over the three-year period than the Bank predicted in August and above most economists' expectations.
But Carney's warning on a slowdown in emerging markets may in part reflect the concerns of BoE Chief Economist Andy Haldane who warned in September that China's sharp stock market falls could prove the start of a third act of the global financial crisis which started in 2008.
Minutes of the MPC's discussion this month showed there was "a wide spread of views" about the outlook for growth, inflation and the impact of the slowdown in emerging markets.
($1 = 0.6568 pounds)