UK inflation sees off rate rise for now

Experts believe that UK inflation means interest rates will not start to rise until well into 2016.

UK inflation sees off rate rise for now

Today’s UK inflation as measured by the Consumer Prices Index remained at -0.1% in October, the Office for National Statistics has said.

Commenting, Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “Inflation still remains well below target, with lower food and fuel prices continuing to weigh down the headline Consumer Price Index. Core inflation is likewise weak, so savers are unlikely to get an early Christmas present from the Bank of England following its next policy meeting in early December.

“Yesterday NS&I cut the interest rate on their Cash ISA to its lowest ever level, a reminder that although the economy looks in decent shape, cash savers are still bearing the brunt of ultra-loose monetary policy, and things may yet get worse before they get better.

“The good news is wages are rising above inflation, and mortgage interest payments are likely to remain low. This puts more money in consumers’ pockets, which is positive for the UK economy.

“The market now expects a rate rise in the UK in the summer of 2016, however such forecasts have been chasing the pot of gold at the end of the rainbow for more than six years now.”Bottom of Form

Maike Currie, associate investment director at Fidelity International agrees. “To date Mark Carney has had to pen four open letters to Chancellor George Osborne explaining why UK inflation is so far below the Bank of England’s target rate of 2%. In his latest letter, Carney said he expected inflation to remain below the 1%-mark until the second half of 2016.

“For now the UK’s weak inflation rate is largely due to external factors – persistently weak global demand and a strong pound pushing down commodity prices. However, as the Bank of England’s chief economist Andy Haldane points out, over time these pressures should wane, and the key factor that will determine the future path of inflation will be domestic costs, specifically labour costs.

“But the UK labour market has been an unpredictable beast in recent years with wage growth remaining lacklustre despite the strong rise in jobs. One reason why wages are staying low could be because technology has made it easier and cheaper to substitute man for machine. This suggest much larger structural issues are keeping inflation at bay.

“The Bank of England’s suggestion that interest rates may stay at rock bottom throughout next year may just be the start of it. Interest rates could stay low for the foreseeable future if low inflation turns out to be less cyclical than structural.

“In a low interest-rate environment, investors continue to view equity income as a safe haven and a rare source of yield.”


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