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Hopes of lower inflation strengthen Bank’s hand

Bank of England. Picture: Reuters

Bank of England. Picture: Reuters

  • by KRISTY DORSEY
 

Expectations of an interest hike in the next 12 months increased in the past quarter despite falling inflation, according to the Bank of England.

The bank’s inflation attitudes survey showed that 40 per cent of Britons expect a rate rise over the next 12 months, up from 34 per cent in November and the highest level since May 2012.

That is despite the fact that inflation expectations also fell, to their lowest level in four years. The average forecast for the rate of inflation over the coming year was 2.8 per cent, down from 3.6 per cent three months ago.

The survey shows that people tend to overestimate the level of price rises, with respondents estimating the current rate of inflation as 3.5 per cent on average.

In fact the latest official figures showed UK inflation, as measured by the Consumer Prices Index, fell to 1.9 per cent in January, the first time it had fallen below the Bank’s 2 per cent target in more than four years.

The falling inflation estimates are likely to support the Bank’s message that it is in no rush to raise interest rates.

Britain’s economy staged a faster-than-expected rebound last year, forcing the Bank in February to revise its forward guidance policy, designed to signal no quick tightening of monetary conditions. At the time, the Bank also hinted at a first rate rise in the second quarter of 2015. Some Bank officials have since suggested it could come sooner if inflation pressures are bigger than expected or wages rise faster than anticipated.

However, others point to the fact that the economy is still 1.4 per cent below its 2008 peak and the recovery remains fragile.

In its new version of forward guidance, the Bank said it would only seek to raise rates gradually from their current record low of 0.5 per cent.

 

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