Deflation fears expected to offset interest rates

Bank governor Mark Carney. Picture: Ian Rutherford
Bank governor Mark Carney. Picture: Ian Rutherford
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ANY remaining expectations of an interest rise this year could be kicked into touch this week as the Bank of England publishes its hotly awaited quarterly inflation report.

The document incorporates the bank’s latest forecasts for inflation, which many believe is about to fall into negative territory – def­lation – for the first time. Prices are expected to bounce back once the effect of the dramatically lower oil price has dropped out of the equation, and the timing of that is seen as key to the bank’s actions.

It is thought that the bank’s monetary policy committee (MPC) is unlikely to raise rates – an action usually reserved for dampening price rises – while the CPI measure of inflation remains below its target range of 1 to 3 per cent.

On the other hand, expectations of an autumn rate hike could be strengthened if the bank’s medium-term forecasts remain high.

Howard Archer, chief UK economist at IHS Global Insight, said: “While the Bank of England will obviously have to sharply lower its near-term consumer price inflation forecasts, absolutely key will be how quickly it sees inflation picking up over the medium term. We currently believe it is borderline as to whether the Bank of England starts to raise interest rates at the end of this year or holds fire until early 2016.”

Philip Shaw, at Investec, said Thursday’s inflation report was the week’s most keenly awaited event for UK investors. He said: “Our suspicion is that, whilst the soggy prices patch could leave the MPC in wait-and-see mode through the summer, any normalisation plans will not have been shelved completely; our forecast for the first rate hike is November.”