Bank of England's Nickell suggests interest rates are set to stay on hold

Interest rates look set to stay on hold for the foreseeable future after inflation fell last month and a member of the Bank of England's Monetary Policy Committee said there was no reason to move policy in either direction.

Stephen Nickell, one of the nine economists who set rates every month, said yesterday that inflationary pressures were benign.

"Looking at that there is no reason at the moment to raise interest rates. There's no particularly strong reason to cut interest rates either," he said in an interview with Dow Jones Newswires.

The Bank's forecast is for inflation to rise to its 2.5 per cent target towards the end of a two-year forecast period, with the risk weighted towards it overshooting.

"Maybe we have to start worrying about this rise at the end," he said referring to the Bank's forecast period, "[but] we don't have to start worrying about that rise yet".

His comments came as official figures showed that inflation fell back last month as stores cut prices across the high street.

The annual rate that the Bank of England targets dropped to 1.9 per cent in August from July's 2.0 per cent while the headline rate fell to 1.4 from 1.5 per cent

Goods prices fell 1.1 per cent with discounts on clothes and footwear pushing prices down at their fastest annual rate – 5.9 per cent – since records began in 1947. The cost of furniture also fell as stores found they were unable to push prices up after the very steep sales over the summer.

David Page, UK economist at Investec, said retailers were unable to hike their prices in the face of a consumer slowdown and that weak retail sales data tomorrow could trigger a rate cut next month.

"Against the background of a lacklustre global economy we believe a slowdown in domestic household expenditure will persuade the MPC to ease rates," he said.

However, the deflation in goods prices, driven by globalisation, masked a strong rise in services prices, especially leisure activities such as entertainment and foreign holidays.

Services prices are now rising at 4.6 per cent, their fastest rate for nine years, with leisure service rising by 8.8 per cent.

"Boom and bust [are] living side by side," said John Butler, UK economist at HSBC. "The gap between goods price deflation and service sector inflation continues to widen to unprecedented levels."

Despite the gloom felt by high street fashion shops, prices for clothes bought over the internet surged last month.

In a report that appears to shatter the internet's reputation for pushing down prices, the price of clothes is going up at an annual rate of almost 17 per cent.

Overall inflation for online goods and services is running at 8 per cent – more than five times the headline rate – according to the Goldfish e-Tail index.