Moderating inflation cuts likelihood of Bank rate rise

Consumer prices were up just 1.5% in August matching May's four-year low

Click to follow
The Independent Online

Another fall in inflation during August has pushed back the likelihood of the Bank of England raising interest rates, City analysts said on Tuesday.

Consumer prices were up just 1.5 per cent year on year last month, according to the Office for National Statistics, down from the 1.6 per cent rise recorded in July and matching May’s four-year low. The reading was in line with the City’s expectations and the annual rate has now been below the central bank’s official 2 per cent target for  eight consecutive months, the longest continuous period since 2005.

“It is difficult to see why the Bank of England should even consider raising interest rates at present,” said Ben Brettell of Hargreaves Lansdown.

David Kern of the British Chambers of Commerce agreed, saying: “This is clearly not the time to put the recovery at risk with premature interest rate rises.”

Video: The latest business news

Last week the Bank’s Governor, Mark Carney, had hinted that rates could rise next spring.

But Howard Archer of IHS Global Insight said there was a “mounting possibility” that the Bank would not raise rates until the second quarter of next year.

He added that a Yes vote in tomorrow’s Scottish referendum could push an increase in the cost of borrowing back still further.

“An interest-rate hike would highly likely be delayed if the Scots vote for independence and there are signs that the economy is being adversely affected in the uncertain aftermath,” he said.

In August two members of the Bank’s rate-setting Monetary Policy Committee, Martin Weale and Ian McCafferty, voted to put up rates from 0.5 to 0.75 per cent. Minutes from September’s MPC meeting, due out tomorrow, will show whether any others on the nine-member committee joined them this month – or indeed whether they still favour a rise. Inflation is already undershooting the Bank’s expectations, with last month’s Inflation Report pointing to annual CPI growth of 1.8 per cent in the third quarter of this year.


The ONS said the fall in the inflation rate was driven by lower prices for food and non-alcoholic drinks. An easing in price increases for furniture and household goods also made a contribution, as did restaurant and hotel prices. Upward pressure came from clothing and footwear and alcohol and tobacco.

Wholesale or factory-gate prices were also weak in August, according to the ONS, falling 0.3 per cent year on year and suggesting that inflationary pressures in the economy are receding. However, the ONS also reported that UK house prices rose 11.7 per cent in the year to July, up from a 10.2 per cent increase in the year to June.