Will lower inflation delay BoE rate rise?

Mark-Carney-with-bank-note-in-background-700.jpgThe headline rate of inflation fell to 2.7 per cent in February, according to the Office of National Statistics, reducing pressure on the Bank of England to raise interest rates.

It has been widely expected that the BoE would rise interest rates again in May this year, following its decision in November to raise the Base Rate by 0.25 per cent.

City Index’s senior market analyst Fiona Cincotta says: “These inflation figures give the BoE breathing space and drastically reduce the need for tightening.

“The BoE is now less likely to take action in May, and this is probably what we will hear from the governor of the Bank of England, Mark Carney, when the Bank’s Monetary Policy Committee meets on Thursday.”

Cincotta adds: “The central bank will now be much more inclined to see how the inflation story plays out before stepping up to take action.”

Figures published by the Office of National Statistics show that falling petrol prices and a slower rise in the cost of food contributed to this slowdown in UK consumer price inflation during February.

The main rate of inflation fell from 3 per cent to 2.7 per cent – below the 2.8 per cent forecast. 

John Charcol senior technical manager Ray Boulger says Frebruary’s inflation figures have not led to any marked effect on swap rates.

“I do not expect there to be significant changes to fixed-rates in the near term,” he says. “The market has already factored in a rate rise this year, and I don’t think this forecast has changed.”

However, he adds that it now looks less likely that there will be two rate rises this year, which some were predicting at the start of 2018.

“One of the more positive Brexit stories – for mortgage customers at least – is that the devaluation of sterling, which has led to higher inflation, has meant that the Bank of England has kept interest rates lower for longer.”

SPF Private Clients chief executive Mark Harris says: “Swap rates are highly sensitive to economic data and are often fluctuating on the back of it. One of the driving forces behind an imminent rate rise was said to be soaring inflation so any fall in this is likely to take some of that pressure off.”

However, he added that homeowners shouldn’t bank on interest rates remaining flat, as  more buoyant economic data could put a rate rise back on the cards. 

Not all economists are confident this lower inflation will result in a marked delay to rate rises. Centrip’s chief market analyst says: “The Bank’s rhetoric over the last few months has shifted to one with a more hawkish tone, and we envisage more rate rises than the three in three years that have currently been assume.”

Online trading platform Infinox’s head Jacob Deppe adds: “There are simmering concerns about household debt levels and banks taking risks with their mortgage lending that could lead the Bank to raise interest rates anyway [in May].” 

He added there were also continuing Brexit concerns. “This may cause Carney to hike rates to give himself the wiggle room to cut them later if he needs to.”

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