Pressure on the Bank of England to raise interest rates continues despite the fall in inflation rate to 1.6 per cent, below the Bank’s two per cent target rate.
The Office for National Statistics (ONS) stated that the annual inflation rate, as measured by the consumer price index, declined from 1.6 per cent in July to 1.5 per cent in August. This is the lowest level of inflation since the economy went into recession in 2009.
Although inflation and wage growth are subdued, the economy, housing and labour markets are improving rapidly, making the Bank’s emergency low interest rate policy settings unnecessary.
Jeremy Lawson, chief economist at Standard Life Investments, said, “Our current view is that the Bank will begin raising interest rates in the first quarter of 2015. There seems to be a growing recognition on the Monetary Policy Committee (MPC) that beginning the tightening cycle earlier will allow the removal of accommodation [through low rates] to occur more gradually.
“The risks to that view are probably more towards a later tightening, particularly if underlying wage growth fails to pick up meaningfully over the coming months, or political uncertainty increases.”
Of the nine members of the BoE’s MPC, seven voted to keep interest rates at their historic low of 0.5 per cent at the September meeting.
The two MPC members in favour of an immediate quarter of a percentage point increase warned that interest rates should be raised before signs of inflationary pressure were obvious, and that the economy would not be derailed by a slight increase.
Chart
julia.faurschou@ft.com
