British inflation is likely to fall below 1 per cent in the next six months, the Bank of England said yesterday, giving tacit endorsement to markets’ view that it will not raise interest rates until late next year.
The central bank said that since its last set of economic forecasts in August, markets had pushed back their expectation for the date of a first rate rise until October next year from the first three months of 2015.
Inflation has fallen unexpectedly fast to a five-year low of 1.2 per cent, and the BoE said the outlook for inflation had also weakened due to a sharp fall in commodity prices.
Inflation has fallen unexpectedly fast to a five-year low of 1.2 per cent
If it raised interest rates as markets expected, inflation was still likely to be just below its 2 per cent target in two years’ time, the central bank predicted. “Inflation is expected to remain below the target in the near term, and is more likely than not to fall temporarily below 1 per cent at some point over the next six months,” the BoE said in its quarterly Inflation Report.
If inflation dips below 1 per cent, BoE Governor Mark Carney will have to write a letter of explanation to finance minister George Osborne – whose Conservative Party has scheduled a national election for May 2015. “When bank rate does begin to rise, the pace of rate increases is expected to be gradual, with rates probably remaining below average historical levels for some time,” the BoE said, repeating its long-standing guidance on rates.
Despite a weaker global outlook, the BoE left its forecasts for British economic growth little changed, saying that cheaper finance should offset the effect of weaker overseas demand.
The central bank continues to expect 3.5 per cent growth this year – which would make Britain the fastest growing big industrialised economy – followed by 2.9 per cent in 2016, only a shade lower than it forecast in August “The main downside risk stems from weaker euro area activity, which would weigh on UK exports and could be associated with a further rise in financial market volatility.”
The BoE also still expects a big rebound in wage growth next year, with wages rising by 3.25 per cent – a rate not seen since the financial crisis – after growth of 1.25 per cent this year. Data out earlier yesterday showed a bigger-than-expected pick up in wage growth in the third quarter, with average weekly earnings excluding bonuses rising by 1.3 per cent. Inflation has generally outstripped wage growth in recent years.
The BoE expects more modest declines going forward, with the rate down to 5.4 per cent by late 2015.
The BoE said its lower inflation forecast largely reflected falls in the price of oil and weaker price growth for food and some other imports. But there were signs of lower domestic price pressures too.