Fears recede over base rate rise

Fears of another base rate rise were partially alleviated last week after the Bank of England’s inflation report indicated that further hikes may not be necessary.

In its quarterly report, the BoE predicts that although inflation is likely to continue to rise before the end of the year the first half of 2007 will see it fall back to target because of the recent fall in oil prices.

It also suggests that inflation could be pushed down to 2% if interest rates are at 5.1% in early 2007 or 5.2% later in the year.

The news comes after the BoE confirmed expectations of a November rate rise by pushing interest rates up to 5% to try to tackle inflation which remained at 2.4% in October.

Many industry pundits predicted a further rise in February but the latest inflation report tempers this expectation.

Andrew Gall, business economist at the Building Societies Association, says: “The report has tempered people’s expectations of another rate rise early in 2007 but what happens depends on wage increases in the new year.

“If the BoE sees people have priced in higher inflation in wage demands it might take further action but if things are subdued it may be able to get away with keeping rates at 5%. It’s a question of wait and see.”

Gall adds that any rate changes in December and January are extremely unlikely as the BoE does not like to make changes in the run-up to Christmas. Therefore, any rise won’t happen until February at the earliest.

Mervyn King, governor of the BoE, also warns in the report that the Monetary Policy Committee stands ready to take action if inflation shows signs of volatility.

Andrew Montlake, partner at Cobalt Capital, says the inflation report is reassuring but warns that the BoE will have to take conditions in the wider economy into consideration before ruling out a hike in early 2007.