Interest rate rise on back burner as inflation falls

Fall in the inflation rate is good news for Mark Carney. Picture: Getty

Economists said rates were unlikely to be increased from their current record low of 0.5 per cent until next year, at the earliest, despite unemployment falling.

The central bank said in August, just after Carney took up the post of governor, that it would only consider pushing up borrowing costs once the jobless rate falls to 7 per cent, unless inflation threatens to get out of control.

Yesterday’s official data showed that the benchmark consumer prices index (CPI) eased to 2 per cent in December from 2.1 per cent a month earlier – marking the lowest rate since November 2009, when inflation stood just below the Bank’s target level.

Analysts had been expecting higher gas and electricity bills to trigger a modest rise in inflation last month but there was some good news on food prices and the cost of recreational goods such as computer games. It was the sixth successive monthly drop in CPI.

Howard Archer, chief UK economist at IHS Global Insight, the forecasting consultancy, said: “The Bank of England will likely be reassured to see [inflation] dipping to 2 per cent in December… and it reinforces our belief that interest rates are going nowhere in 2014 despite the unemployment rate now looking poised to get down to 7 per cent in the first half of this year.”

“We think the Bank is most likely to hold off from raising interest rates until the first half of 2015.”

However, Jason Hollands, managing director at investment service Bestinvest, noted: “The Bank has been at pains to communicate a dovish message but the markets are increasingly factoring in a rate rise over the next year while, reportedly, mortgage lenders are stress testing applicants.”

The retail prices index measure of inflation, which factors in housing costs, rose to 2.7 per cent last month from 2.6 per cent in November.