Economists have pushed back their expectations for the first rise in the UK base rate, as inflation looks set to drop below 1 per cent.
The latest Bank of England (BoE) quarterly inflation report last week said it was “more likely than not” that the rate of UK inflation would fall below 1 per cent at some point in the next six months, dragged down by falling food and oil prices.
The report was interpreted as being extremely dovish, implying that the high level of monetary easing was likely to continue for some time, marking a significant change in sentiment from the August inflation report.
The recent report has prompted David Page, senior economist at Axa Investment Managers, to “fine-tune” his forecast for the first UK rate rise.
He had previously predicted the BoE’s Monetary Policy Committee (MPC) would raise rates in May 2015 but has now pushed back that prediction to August.
“We think the MPC will be insufficiently determined to tighten policy during the uncertainty that looks likely to surround next May’s election,” he said.
“We think that by August, the end of near-term inflation weakness will be within sight and medium-term inflation pressures (including from weaker productivity growth) will see inflation projected above 2 per cent.”
The rate of inflation has been taken as a signal of overall economic activity. If it dips below 1 per cent, less than half the BoE’s long-running 2 per cent target, that would suggest the UK recovery was not strong enough to handle a tightening in monetary policy through a rate rise.
Kerry Craig, global market strategist at JPMorgan Asset Management, said interest rates in the UK “could be on hold until October 2015”.
He highlighted how swiftly the outlook for rate rises had changed since BoE governor Mark Carney’s speech in June when he warned rates could rise sooner than the market expected. This led some to believe the first rise would come in 2014.
“Since then,” he said, “weaker global growth outlook and sharp falls in global inflationary pressures have pushed [back] the expected date of the first rate rise by nearly 12 months.”
Given how swiftly the economic data had changed interest rate expectations, Mr Craig warned that investors should still prepare for a rate rise because such a move was now highly “data dependent” and could happen sooner if certain economic indicators picked up.
Azad Zangana, Schroders’ European economist, said the cautious tone expressed by Mr Carney on global economic growth as well as inflation, meant “interest rates could be kept unchanged until the end of 2015”.
However, some commentators have said weak inflation caused by the drop in the price of oil should only be temporary.
But Mr Zangana pointed out that Mr Carney claimed disinflationary effects could be long-lasting, with the governor pointing out that downside risks had been crystallising in the shape of weaker growth in Europe and emerging markets, along with greater geopolitical risks.
