Should BoE defer a rate rise?

Following the news this morning that the Consumer Prices Index is at its joint lowest level since records began, there has been growing speculation surrounding when the Bank of England will increase interest rates.

Related topics:  Finance News
Rozi Jones
13th January 2015
bank of england boe

Many industry professionals have argued that a 15 year low for inflation will cause the Bank of England to hold off any potential rate rises until 2016.

Alan Cleary, Managing Director at Precise Mortgages, said that the markets are definitely taking a view that the BBR rise is pushing further out, and that today's CPI numbers will continue that trend.

Additionally, David Whittaker, Managing Director of Mortgages for Business, stated that the firm "no longer expect the Bank of England to raise the base rate of interest until Q2 or Q3 2016."

He added:

"The UK economy still needs a serious burst of productivity growth – and there’s no longer any reason to get in the way of that. A new paradigm is already being felt on the financial markets this morning – and it will be felt in the pockets of consumers and mortgage holders within weeks."

Rain Newton Smith, CBI Director of Economics agreed, stating that "even by the end of 2016 the stance of monetary policy is likely to remain loose, providing a bit more breathing space for the UK’s recovery.”

Peter Brodnicki, Chief Executive of Mortgage Advice Bureau, said:

"Interest rates are predicted by many to remain unchanged until at least the 4th qtr, that is now likely to move into next year with inflation at these levels, with further falls in inflation likely and the real possibility of deflation as in the Eurozone.

"Wage inflation is generally slow and not likely to race away, and property price inflation has definitely slowed, and so right now it is hard to see when rates will actually rise but I think you can definitely rule out any time this year."

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However the fall in CPI does mark good news for mortgage holders, with firms advising clients to fix their mortgage payments. There is also likely to be an addition to the number of low long-term fixes available on the market.

Conversely, some have argued that the CPI dip represents simple disinflation due to the transitory impact of weaker oil, and that 2015 will see a rise in economic growth.

Azad Zangana, Senior European Economist at Schroders, said that falling oil prices could encourage greater household spending and that "as a result, we do not expect the Bank of England to consider easing monetary policy at all in the near future."

Global oil prices are expected to stabilise, meaning that the Bank could still consider raising interest rates towards the end of the year.

Guy Ellison, Head of UK equities at Investec Wealth & Investment, said that excluding more transient factors, CPI actually increased marginally to 1.3% year-on-year and it is this number which the Bank of England should focus on when considering rate policy. He added that there is a growing need for the Bank of England to "raise rates sooner rather than later to ward off inflation diminishes.”

NIESR recently predicted that the Bank of England will hold interest rates until after this year's general election, forecasting a rise from the current level of 0.5% to 1% by the end of 2015 before rising gradually to to 2.75% by the end of 2019.

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