InvestmentsAug 18 2015

Market View: Inflation increase could nudge up rates

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Market View: Inflation increase could nudge up rates

Economists have suggested this morning’s unexpected rise in inflation - to 0.1 per cent from zero in July - will provide further fodder for speculation over an interest rate rise later this year.

Here are some more detailed musings on the Office for National Statistics figures:

Adam Chester, head of economic research and market strategy at Lloyds Bank Commercial Banking.

“This morning’s UK CPI numbers defied expectations that plummeting oil prices and a strong pound could push headline inflation back into negative territory in July,” he commented, noting that the ‘core’ inflation rate also jumped from 0.8 to 1.2 per cent - its highest for five months.

“The surprise rise, especially in the core rate, has led to a knee-jerk spike higher in the pound. and reaffirmed market expectations that UK interest rates could rise in the first half of 2016.”

Mr Chester added that while the Bank of England is unlikely to read too much into one month’s data, the pick-up in the core rate is a timely reminder that not all indicators of inflation are pointing south.

Ben Brettell, senior economist at Hargreaves Lansdown.

Mr Brettell warned that the rise in the core figure suggests that underlying inflationary pressures could be building in the economy, and is possibly the “clearest indication” yet that the Bank might have to raise interest rates sooner rather than later.

Continued falling oil prices could depress the headline rate of inflation well into next year, he added, although policymakers know this is ultimately a temporary factor and as such are increasingly looking at the core measure when deciding whether higher interest rates are appropriate.

“It will take some time for more MPC members to be persuaded to vote for higher rates, and I still think early 2016 is more likely.

“Thereafter the path of rate rises is likely to be a slow incline, and it wouldn’t surprise me to see them stuck on 0.75 per cent for some time.”

Scott Corfe, head of macroecnomics at the Centre for Economics and Business Research.

At the end of last year, CEBR said it expected the UK to enter a brief period of deflation as oil prices collapsed, this subsequently materialised and the UK has been in a period of low-to-negative consumer price growth since the start of 2015, Mr Corfe said.

He added: “It’s hard to see where any significant inflationary pressure will come from in the remainder of 2015 and 2016, with the UK on course to see inflation below the Bank of England’s central 2 per cent target until 2017.

Mr Corfe also expects monetary policy to “remain looser for longer than many expect”.

He added: “In the UK, the Bank of England will almost certainly keep rates on hold until the first half of next year.”

peter.walker@ft.com