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Market View: ‘Noflation’ reduces rate rise risk

Market View: ‘Noflation’ reduces rate rise risk

As UK inflation dropped back to 0 per cent in August, from 0.1 per cent in the year to July, several economists predicted any rise in interest rates will be pushed back further.

Here are their views for your perusal:

Ben Brettell, senior economist at Hargreaves Lansdown.

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He pointed out that core inflation, which strips out volatile components like food and energy, fell to 1 per cent, following last month’s jump from 0.8 per cent to 1.2 per cent, which had prompted suggestions that underlying inflationary pressures could be building.

“Today’s drop could provide the Bank of England with some breathing space to leave interest rates on hold for longer in the face of global concerns.”

Mr Brettell also pointed out that with domestic growth and the labour market recovery looking healthy, if unspectacular, some policymakers are increasingly considering that higher rates are appropriate.

“Rate-setter Martin Weale said last week that rates would have to rise ‘relatively soon’ and another MPC member Kristin Forbes has also said they will probably rise in the near future.

“Both voted to leave rates on hold at this month’s meeting, but their rhetoric suggests they might soon join Ian McCafferty in voting for a rise of 25 basis points.”

Mr Brettell added that on balance, the BOE will likely wait until at least next spring before acting.

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

He stated that ‘noflation’ has boosted average earnings by over £500 and the government should do more to ensure it persists.

“Containing the cost of living is a great way of driving up living standards and boosting economic growth, provided the risk of an economically damaging deflationary spiral is properly managed.

“The government has decided to attempt to boost living standards in the UK with an artificial national living wage which is detached from market fundamentals and which official estimates suggest will cost 60,000 jobs.”

Mr Corfe added that rather than determining wages, the state should instead focus on the cost of living, with house building to address the chronic undersupply of homes in the UK being an absolute priority.

Anna Stupnytska, global economist at Fidelity Worldwide Investment.

She noted that near-term risks to inflation are skewed on the downside, partly due to lower commodity prices and the strong pound, adding that for an inflation-targeting central bank, this is not a rate hiking environment.

“Before inflation shows definitive signs of a pick-up, which is unlikely to happen this year, the BOE will have to exercise caution. In addition to the lack of inflation, the economic recovery remains quite uneven.”

Ms Stupnytska commented that the combination of low inflation, external risks and tighter financial conditions is likely to keep the BOE on hold for the time being.

Overall, an interest rate hike this year remains highly unlikely, she said, predicting that the actual hike is more likely in 2016.

peter.walker@ft.com