Bank of England governor Mark Carney has said policymakers are in no rush to raise interest rates amid a weakened world economy and slowing UK growth.
He said “now is not yet the time” to hike rates from their historic low of 0.5 per cent following turmoil in financial markets as oil prices have plunged and China’s economic slowdown has spooked investors.
In a speech at Queen Mary University of London, Carney said a rise in UK rates will “depend on economic prospects, not the calendar”.
The outlook has changed dramatically since last summer’s prediction that the decision to raise rates would come into sharper relief at the turn of the year, he said.
He added: “The world is weaker and UK growth has slowed. Due to the oil price collapse, inflation has fallen further and will likely remain very low for longer.”
He said “unforeseen disturbances” meant the path for interest rates “cannot be preordained”, adding: “That means we’ll do the right thing at the right time on rates.”
Carney’s comments came as official figures showed the UK’s rate of inflation edged up to its highest level for nearly a year last month as a sharp rise in air fares over the Christmas holidays offset falling food and clothing prices.
The Office for National Statistics (ONS) said the consumer prices index (CPI) rose to 0.2 per cent in December, up from 0.1 per cent in November and the highest reading since January 2015.
Air fares soared by 46 per cent between November and December due to the seasonal rise in flight costs over the festive season, marking the biggest leap for 13 years, with long-haul flights in particular impacted – although the ONS said inflation readings for flights can be volatile.
Prices on the forecourts continued to fall, with petrol down by 3.4p a litre, although this was less than the 6.1p drop seen a year earlier.
James Tucker, head of CPI at the ONS, said: “Today’s small rise in CPI was mainly down to air fares and motor fuels, partially offset by falls in alcohol and food prices.
“While this modest rise takes CPI to its highest level for 11 months, it is still at historically low levels.”
Carney’s speech comes after the International Monetary Fund (IMF) once again slashed its global growth forecast, while data from China also showed the country’s economy growing at the weakest pace in 25 years.
The US last month hiked raised rates for the first time in nearly a decade as America’s economy expanded strongly last year, but Carney said this does not mean the UK will follow suit with a rate rise soon.
He said: “Last summer I said the decision as to when to start raising bank rate would likely come into sharper relief around the turn of this year.
“Well, the year has turned and, in my view, the decision proved straightforward: now is not yet the time to raise interest rates.”
Financial markets have pushed back their expectations for an interest rate rise until well into 2017 after recent dramatic falls in global equities, which saw around £110 billion wiped off the value of UK blue chips in the first two weeks of the new year.
Rates staying lower for longer is good news for homeowners, but will come as a further blow to savers, who have seen their nest eggs whittled away by record low rates since the 2008 financial crisis.
Tumbling oil prices – to below $28 a barrel for the first time in nearly 13 years at one stage in recent days – also means the Bank expects the pick-up in inflation to be more gradual than predicted in its November forecast.
Carney said policymakers needed to see faster economic growth, higher pay and more core inflation before deciding to increase rates.
He said the UK’s economic growth over 2015 had “disappointed”, averaging 0.5 per cent per quarter against its earlier expectations of 0.7 per cent.
He added that the outlook for the global economy may weaken further, in particular due to China and other emerging market economies.
Chinese trade had been “strikingly weak” recently, he said, with the UK hit hard by a slump in demand for overseas exports.
British exports to China have dropped by a third in the year to November, he added.