Rate rise on hold after surprise fall in inflation


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The Independent Online

The first rise in interest rates from the Bank of England could be more than a year away following a shock slide in inflation to a five-year low of 1.2 per cent in September, experts said yesterday.

A supermarket price war, lower petrol costs and falling air fares helped push the consumer prices index – the Bank’s official inflation benchmark – to its lowest level since September 2009, well below Threadneedle Street’s 2 per cent target.

As recently as June, in his Mansion House speech, the Bank’s Governor Mark Carney fuelled speculation of a first hike since 2007 as soon as next month, saying rates could rise “sooner than markets currently expect”.

But yesterday’s inflation data – coming against a backdrop of tumbling crude oil prices and a eurozone in danger of slipping back into recession – prompted forecasts that the Monetary Policy Committee could wait until well into next year before acting. September’s inflation rate was well below the 1.7 per cent forecasted by the MPC in August’s Inflation Report.

Scott Corfe, at the Centre for Economics and Business Research, said rate setters could hold off until after May’s general election: “What looked like a February 2015 rate rise a few months back is increasingly looking like a November 2015 rate rise. The unusually uncertain economic environment at present means that a rate rise is likely to come later rather than sooner.”

The pound dipped back below $1.60 on the weak figure, close to the 11-month low of $1.5943 seen last week. Food prices are down 1.5 per cent year on year and petrol and diesel are down 6 per cent, bearing down on the inflation rate. Even so, inflation is still running at twice the rate of average wages, which grew 0.6 per cent year on year in the quarter to July.

Two of the MPC’s nine members are currently voting for higher rates. Experts said the tumbling price of Brent crude oil – down more than 20 per cent since June’s high of above $115 a barrel – would ease the pressure on inflation and could even trigger a first ever letter from the Governor to the Chancellor to explain why inflation had fallen more than 1 per cent below the inflation target.

Panmure Gordon’s Simon French said: “The recent and dramatic fall in the world oil price will take three to six months to feed through into CPI, but when it does we expect it to trigger an explanatory letter.

“This is simply not a backdrop to justify imminent rate rises in the UK, and as such we expect to see the November MPC vote to return to an unanimous 9-0 in favour of retaining interest rates at 0.5 per cent.”

The International Energy Agency slashed its forecasts growth in global oil demand for the third time this year, as European and Asian economies weaken. The IEA now estimates growth in global oil demand this year will rise by 700,000 barrels a day – 200,000 lower than previously forecast – while global oil demand in 2015 will expand by 1.1 million barrels a day, 300,000 fewer than had been previously forecast.

“Demand growth... may have touched bottom,” it said.