A double-dip recession is "not on the cards", according to a leading Bank of England policymaker.
Andrew Sentance, an external member of the Bank's Monetary Policy Committee made the case for a "gradual normalisation" of interest rates in a speech yesterday. Mr Sentance was backed by the independent research body, the Centre for Economics and Business Research (CEBR), which also said a double dip was "unlikely", although it also believed the outlook for job creation is much weaker than the official view.
However, one of the heads of the Office for Budget Responsibility, Geoffrey Dicks, said George Osborne's Budget had "logically increased the possibility of a double dip".
These predictions came as inflation registered a modest fall in June, with the consumer-price index down for the second month in a row. CPI fell from an annual rate of 3.4 per cent in May to 3.2 per cent in June, disappointing expectations of a steeper fall. On the older-established retail-price index, which includes mortgage payments, inflation also edged lower, from 5.1 per cent in May to 5.0 per cent in June. Falling petrol and diesel prices were "by far the main driver" in the decrease in annual inflation between May and June, said the Office for National Statistics (ONS).
By contrast, the main upward pressures in inflation were sharp rises in air fares and increases in insurance premiums. In recent months car-insurance premiums have been rising at over 20 per cent, and in June the annual rate of increase hit 35.9 per cent. The insurance industry says the costs of the number of uninsured drivers is the main factor behind this extraordinary rise in premiums.
More broadly, Scott Corfe, an economist at CEBR, commented: "Although inflation remains well above the Bank of England's target of 2 per cent plus or minus 1 per cent, the apparent cooling-off in inflation should strengthen the case for the Bank of England to keep the base rate on hold at 0.5 per cent. Inflation hawks such as Andrew Sentance are likely to remain a minority group. Vast swathes of the economy are still significantly under-capacity, which suggests that inflationary pressure is likely to remain weak for some time to come. "
Economists said that the softening in global commodity prices since May's financial crisis has helped to push down the rate of inflation. Fuel and lubricant prices fell by 1.9 per cent in June compared with May.
Many City economists expect no increase in the base rate before this time next year, and even Mr Sentance is calling for only a modest adjustment in the Bank's stance: "'Rate hike' implies a sharp rise in interest rates, which is not what I favour," he said. "I favour a gradual rise in [the] rate which would be aimed to avoid destabilising confidence through a sudden lurch in policy. 'Tightening' may be technically correct as the opposite of 'loosening' but it implies that monetary policy might become objectively tight and restrain the growth of the economy significantly. Again that is not my view".
There is also the possibility that policy might be relaxed again this year and quantitative easing resumed. In his Mansion House speech, Governor Mervyn King was careful to state that: "If prospects for growth were to weaken, the outlook for inflation would probably be lower and monetary policy could then respond."Reuse content