The Bank of England kept interest rates unchanged at 0.5 per cent after its first meeting of 2015, as tumbling oil prices have pushed inflation to a 12-year low and last year’s rapid growth shows some signs of easing.

The central bank also said it would reinvest £4.35 billion of proceeds from a maturing January 2015 bond in its £375 billion of quantitative easing asset purchases.

The BoE has previously committed to reinvest such funds until it has raised interest rates some way above their record low.

Further falls in oil prices since then and more weakness in the euro zone, Britain’s biggest export market, now mean financial markets do not expect rates to go up for at least another year.

Shortly before the BoE rate decision, sterling hit its lowest level against the dollar in 18 months, suffering from the mix of broad dollar strength, weaker British growth prospects and uncertainty ahead of May’s national election that have seen it slump since the start of the year.

Consumer price inflation fell to 1 per cent in November and if it falls any further below the BoE's 2 per cent target - something the Bank thinks is likely - governor Mark Carney will have to write a public letter of explanation to finance minister George Osborne.

Britain’s statistics office revised down over a year’s worth of growth data last month and private-sector surveys have softened, although 2014 still looks set to be the strongest year for growth since the financial crisis.

Some central bank policymakers are concerned that interest rates may need to rise sooner rather than later to tackle a possible rebound in wage growth this year, as employment levels keep hitting new record highs.

Two of the nine members of the BoE's Monetary Policy Committee, Ian McCafferty and Martin Weale, voted for a rate rise between August and December. The BoE will publish voting records and reasons behind January's policy decision on January 21st.

Reuters